Top Option Trades from September 30

by: Joe Kunkle

Below are a few of the most interesting trades that took place in the options market on Wednesday September 30th, 2009.

I not only provide what the action was that traded, but also the most likely reasoning behind the approach and what it means for shares.

For further analysis, and daily live coverage of the options market, please visit my site at

Best Buy (NYSE:BBY) had a series of large sized trades hit at 3:23pm with 3 blocks of 3,500 contracts trading. The October $35 and November $36 puts were sold for $0.35 and $1.50 respectively, with the trader feeling shares have minimal downside. The electronics retailer recently broke trend support and closed below its 50 day EMA, an ascending triangle breakdown. The same trader picked up 3,500 December $40 calls at the $1.75 offer, a net trade credit of $0.10. The trader may be making an extended bet on a strong holiday shopping season due to lack of competition from Circuit City, and Best Buy shares do appear undervalued at 11.9X forward earnings.

Mohawk (NYSE:MHK) options were active as a trader at 10:11am sold 3,190 November $40 puts at the bid for $1.20, and bought 1,595 November $50 calls for $2.40 is a costless bullish ratio risk reversal. Mohawk has been involved in some takeover chatter in recent weeks, and implied volatility is elevated at 55%. Shares struggled to break through $52.50 resistance and now look to be having a near term breakdown, closing below its 50 day EMA for the first time since early July. Shares trade cheap on a cash flow basis at 6.7X. The bullish action today comes despite a downgrade from Buy to Neutral at SunTrust. As housing comes out of a bottom, the leading provider of flooring is expected to see improved demand for its products.

Computer Associates (NASDAQ:CA) saw large blocks of November $22.50 puts being bought in the afternoon with shares at $21.99, as 3,575 traded against OI of 1073, mostly in two large blocks, a bearish bet. Implied volatility is at 41% which is near 6 month highs. The maker of application software trades just 12X forward earnings and 10.9X cash flow. The near term bearish bets are unusual with no expected catalysts coming in October. CA has a lot of cash and could possibly be an acquirer going forward, and the chart is a bit bearish with shares beginning to roll over after failing to break through its 200 week EMA.

Textron (NYSE:TXT) had a trader place a bullish risk reversal for 3,000 contracts, selling the December $14 puts at $0.50 and buying the December $24 calls for $0.50, a no cost trade betting on upside in shares currently trading for $18.98. Textron shares trade 2.7X cash value and are seen as an attractive recovery play as it settles many of its debt obligations and shows a stronger balance sheet. The CEO is stepping down in December and it was rumored months ago that TXT could be an acquisition target for a group in the United Arab Emirates at around $21 per share. Earnings are scheduled for October 27th. $19.72 and $29.71 are the next resistance areas for shares, the 23.6% and 38.2% Fibonacci retracement levels from peak to trough.

Harley Davidson (NYSE:HOG) shares are breaking down below its 50 day EMA and a block of October $22 puts, 6,400 contracts, and a few others amounting to 10,000+ contracts have been bought at the offer. Earnings are set for October 15th, the week of Options Expiration. If the economic numbers are not as positive as hoped, high expense discretionary items will continue to struggle, and Harley could disappoint investors.

Dreamworks (NASDAQ:DWA) trades a 2,000 contract bull risk reversal with a seller of the December $30 puts at $0.85 also buying the December $40 calls at $1.04 for a $0.19 debit. Shares are right in the middle of those strikes at $35.24 so the trader is risking a small amount to look for considerable upside in shares, while feeling $30 is a safe support area for shares. Dreamworks is a name many see as takeover bait after the Marvel purchase by Disney. Earnings are set for October 27th and shares have dipped nicely for an entry point in this strategy, testing gap and breakout support.

Valeant Pharma (VRX) with big block buying at the offer in December $22.50 puts with shares at $27.50, a block of 2,900 and 500 thus far with implied volatility at 1 year lows. The puts traded with blocks of equity and the low delta puts are likely a protective put play on the shares as a hedge. Valeant shares are trying to breakout to new highs. As a drug manufacturer shares are cheap at less than 10X cash flow and the Company today announced the purchase of an Australian skincare brand. Its pain drug, retigabine, recently failed some mid-stage trials, but with a partnership with Glaxo (NYSE:GSK) it plans to submit an NDA before October 23rd. With 15% of the float short, 11 days to cover, I interpret this put activity as bullish because of the strikes used and the equity blocks trading, showing traders are looking to get long the name on a potential short squeeze breakout, combines with the chance of positive drug news. Retigabine is a first-in-class neuronal potassium channel opener for the adjunctive treatment of partial-onset seizures in adult patients with refractory epilepsy. Retigabine has shown robust efficacy and safety as demonstrated in two large completed Phase 3 trials conducted in patients with refractory epilepsy receiving treatment with up to three antiepileptic drugs (AEDs).

DirecTv (NYSE:DTV), recent speculation of a Verizon takeout, trades a massive options position tied to a block of 660,000 shares, as the November $27/$28 call spread is sold for a $0.50 credit on 5,000 contracts, and the proceeds are used to purchase 10,000 November $23 puts at $0.25 each, a costless trade. The options trade is extremely bearish, but combines with the equity is more of just a costless hedge as shares are breaking out nearing all time highs just below $29. Now, if only they could settle the Versus Network dispute with Comcast.

3 Par (NYSE:PAR) is trading 16X its normal put volume as some big blocks of puts were just bought in October, 1,500 of the $12.50's and 1,000 of the $10's. Implied volatility is climbing from 79% to 83% today. Earnings are not set to be released for October expiry so the action is very unusual, possibly looking for a bad pre-announcement.

CF Industries (NYSE:CF) is seeing some bullish spreads trading with the November $80/$95 call spread being bought twice for 2,500 contracts for a $7.30 debit on a potential $15 payoff with shares above $85 on November expiration. Agrium (AGU) has made it clear that it will pursue the acquisition of CF, although CF is more interested in acquiring Terra (TRA). Regardless, many believe that the worst is behind the fertilizer group and it is one of the most attractive industries for futures earnings growth, and CF is an example with a forward PE of 12.5X and trading 10.6X cash flow. Shares bounced nicely off trend support and prior breakout level at $85 and appear headed higher from here.

ValueClick (VCLK) November $12.50 and $15 calls traded more than 3,000 contracts each and the orders were marked spreads with offer side buying in the $12.50's and bid side selling in the $15's, bullish call spreads accounting for most of the activity. VCLK trades 9.1X free cash flow and is near a breakout, and is also seen as a takeover target.

Kimberly Clark (NYSE:KMB) shares were strong throughout the session and had elevated call action, with the November $60 calls and January $60 calls attracting a flurry of offer side buying in each. Earnings on October 22nd.

Manulife Financial (NYSE:MFC) had a late day block buy of 2,375 October $20 calls with shares at $20.90, bought at the offer in a bullish bet. At 2.15X cash and 3.8X cash flow it is tough to argue against a bullish stance in the Life Insurer.

Disclosure: Own calls in CF, considering buying calls in TXT/MHK and puts in CA