Wednesday Options Update: SWHC, UNG, SNDK, & MU

Includes: AOBC, MU, UNG, WDC
by: Interactive Brokers

Smith & Wesson Holding Corp. (SWHC) – Firearms and ammunition manufacturer Smith & Wesson hasn’t had a real nice time of it lately with shares missing out largely on the broader rally. Are guns the first thing to go in a recessionary environment? We doubt it – not during days of heightened terror alerts and an increasing number of personal background checks. Those are a prerequisite for buying a gun, legally at least. The attempted share price rally to $6.98 ran out of ammo in July yielding to a persistent assault on breaking ground below $3.87 during December. But it wasn’t to be and a 6.7% jump today has lifted it back to $4.50. We believe we’re seeing a couple of options strategies in play. Outright call buying is evident in the February contract at the $5.0 strike where a 25 cent premium has changed hands on around 1,100 call options granting rights to buy the stock 11% higher than it stands today. Only 345 contracts were held by investors before today. Another strategy appears in the July contract where the $5.0 straddle appears to be in play with investors selling to reap the $1.60 premium thanks to a still lofty 72% reading for implied volatility. The strategy is optimized at expiration in six months in the event that the share price idles at the $5.00 strike price, but the investor makes money so long as shares remain range bound within $3.40 and $6.60. The latter would see spirits lifted back towards the July 2009 peak.

U.S. Natural Gas Fund LP (NYSEARCA:UNG) – The good news is that as cold as it is today, one investor seems prepared to discount the uncomfortable conditions and is expecting a return to normal temperatures. The bad news is that you can expect a return to normal by July according to an option combination apparent at that expiration. It appears that an investor took advantage of the extended freeze around the world to make a contrarian play in the natural gas fund by selling around 1,000 call options at the July $13 strike for 75 cents in order to get long the same expiration $10 strike puts for $1.11 each. The fund surged again today in line with a jump in energy prices. Heating oil remains the exception but crude oil is up at $82.65 while the price of natural gas is almost 6% higher at $5.97 per btu. The UNG fund, which mirrors the performance of the price of natural gas is 4.7% higher at $10.80. It hasn’t traded above $12.22 since August 2009. The fund bottomed out on December 3 at $8.50, which is likely the fear embedded in this investor’s mind as he targets cheaper downside protection.

SanDisk Corp. (SNDK) – Investors planted bullish omens across multiple contracts on SanDisk today as shares of the firm rallied 4.5% to a new 52-week high of $31.97. SNDK received an upgrade to ‘buy’ from ‘average’ with a target share price of $37.00 at Caris & Company, as well. Near-term optimists shed 2,000 put options at the January 31 strike for an average premium of 75 cents apiece. Put-sellers retain the full 75 cent premium received on the trade if SNDK’s shares trade above $31.00 through expiration. The nature of the short put sale implies investors are willing to have shares put to them at an effective price of $30.25 apiece should the put contracts land in-the-money. Plain-vanilla call buying took place at the February 33 strike where approximately 1,500 calls were picked up for an average premium of 2.14 each. Investors holding these contracts accrue profits if SanDisk’s shares surge 10% to breach the breakeven point at $35.14. Finally, longer-term bulls bought 2,000 calls at the April 32 strike for 3.40 apiece. These individuals profit if shares of the firm jump 10.7% to $35.40 in the next several months to expiration.

Micron Technology, Inc. (NASDAQ:MU) – Option traders initiated diverse strategies on the manufacturer of semiconductor devices today. Nearer-term bullish activity took place in the April contract, while far-term bearish sentiment settled in the January 2011 contract. Micron’s shares are up slightly by 0.25% to $11.20 as of 12:30 pm (EDT). One investor revealed optimistic sentiment on the stock by rolling a long call position up to a higher strike price. It appears the trader originally purchased 10,000 calls at the now deep in-the-money April $8.0 strike for an average of $1.10 apiece back on October 26, 2009. Today the investor sold the calls for $3.30 per contract. Net profits on the transaction amount to $2.20 apiece. Next, the trader reestablished a bullish stance on MU by purchasing 10,000 calls at the higher, albeit in-the-money, April $11 strike for $1.30 per contract. Profits are available to the MU-bull if shares rally above the breakeven price of $12.30 by expiration in April. In contrast, a seemingly bearish trader put on a short straddle strategy in the January 2011 contract. The investor sold 3,000 puts at the January 2011 $10 strike for $1.72 each in combination with the sale of 3,000 calls at the same strike for a premium of $2.98 apiece. The gross premium of $4.70 per contract on the straddle is retained in full by the investor only if shares fall 10.50% from the current price to $10.00 by expiration next year. We note that the straddle may also merely expect lower volatility on Micron, which would aid in his ability to buy back the short position for less than the total premium received, for a net profit.

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