Friday Options Update: AN, GE, POT, PCLN, ERIC

Includes: AN, BKNG, ERIC, GE, NTR
by: Interactive Brokers

Autonation Inc. (NYSE:AN) – The used-car seller had done rather well on the view that the 92.9% of the population still working would be more likely to buy a used rather than a new car to get through commuter traffic. As such shares rose from $4.00 to $14.00 in the past five months. Today a pretty stiff downgrade from UBS has sent shares down 11% to stand at $12.21 cutting its view from ‘neutral’ to ‘sell,’ citing liquidity concerns. Annual revenues peaked in 2004 and have been on the wane ever since. One investor positioned for a further slide in the company’s fortunes by selling calls to buy puts both expiring in October. Some 10,000 puts purchased at the 10.0 strike infer a further 18% share price slide. The simultaneous sale of 15.0 strike calls mainly offset the premium on the puts leaving the investor with a tiny one dime premium on the trade. Of course there’s no free lunch here and the investor is on the hook for having to deliver one million shares if called in the event shares do quite the opposite by October. Implied options volatility remained steady in the face of today’s decline at 79%.

General Electric (NYSE:GE) – One day after a marathon six-hour conference call, option traders were quick to sell call options on General Electric having digested a vaguely more pessimistic reflection from management. Shares drooped 3.75% to $9.75 as investors pondered reduced earnings forecasts from at least two analysts having assessed GE’s exposure to the U.S. consumer, its capital position and the quality of its real estate exposure. A good amount of 9.0 strike calls were sold for a premium of 1.50, while upper strike calls at the 10.0 strike were sold more than 5,000 times for an 88 cent premium, while calls at the 12.0 and 15.0 strikes were also ditched to recoup premium. On the put side, some 9,000 contracts were bought by investors looking to protect against further retracements in the underlying share price. The average 47 cent premium implies protection at expiration below a share price of $8.53. Options implied volatility stayed calm at a reading of 94% today.

Potash Corporation of Saskatchewan, Inc. (POT) – Shares of the fertilizer and feed products company have rallied 1% to $80.04 perhaps on higher commodity prices. POT popped onto our ‘most active by options volume’ market scanner after one investor initiated a call spread in the April contract. Looking for upside gains in the stock the trader purchased 11,300 calls at the April 90 strike price for 2.70 apiece, while 11,300 calls at the April 95 strike were sold for a premium of 1.50. The net cost of the spread amounts to 1.20 and yields a breakeven price of $91.20 where profits begin to amass. By selling the calls at the upper strike, profits are capped at a maximum of 3.80 to the trader if shares can rally to $95 by expiration. Shares are currently a long way off and would need to rally by about 14% in order for this bullish investor to breakeven on the trade. (PCLN) – We’re not entirely convinced that the large amount of calls traded today at online travel agent, is necessarily as bullish as it might appear. Shares in the company are 2.7% lower at $76.45 and 75,000 calls have been traded very likely by the same investor. The volume is heavy in April calls. At the 85.0 strike we can see 27,500 were bought for 80 cents. Looking at open interest reveals that open interest built to this amount just before and after earnings were announced last month at premiums between 1.33 and 3.10. We suspect that checking investor positions after this weekend will reveal that today’s purchase was profit taking on a short position. Volume of 12,500 at the April 75 and 35,000 calls at the same expiration 80 strike both traded to the middle of the market and we can’t readily tell and can only suspect more written options as on investor continues to take a dim view on consumer travel online.

LM Ericsson Telephone Co. ADR (NASDAQ:ERIC) – Shares of the telecommunications company have dropped 11% to $8.28. Perhaps the decline stems from reports that mobile phone maker, Sony Ericsson, a joint venture between LM Ericsson Telephone and Sony, expects to announce first quarter pre-tax losses. Earnings have been slaughtered by weak consumer demand and destocking by retailers cutting inventory as the global financial crisis continues. Not surprisingly, option traders concentrated on the put side and purchased 1,000 puts at the July 5.0 strike price for 20 cents per contract. Pessimism spreads further into the October contract where more than 3,000 puts were picked up at the 5.0 strike price for a premium of 35 cents each. Option implied volatility has risen sharply from yesterday’s reading at 53% to the current value of 64%.