Wednesday Options Update: TM, ZION, DHI & BBBY

Includes: BBBY, DHI, TM, ZION
by: Interactive Brokers

Toyota Motor Corp. ADS (NYSE:TM) – Toyota-bears are shifting into high gear today as additional negative news regarding brake problems with the Prius stokes the flames of pessimism striking the world’s largest automaker from all sides. The firm took another blow in the form of a downgrade to ‘neutral’ from ‘buy’ at Goldman Sachs Group following the worldwide recall some 7.6 million vehicles. Shares are down 7.25% to $72.51 today as investors continue to receive more bad news about the car manufacturer from sources as varied as Apple Inc. founder, Steve Wozniak, to the Japanese government. Brake-related issues with Toyota’s Prius prompted Japan’s government to mandate an investigation of the world’s best-selling hybrid car. Option traders accelerated bearish moves on Toyota today by scooping up put options in the February contract. Investors bought more than 1,100 puts at the February $60 strike for an average premium of $0.22 apiece. Another 2,000 puts were picked up at the higher February $65 strike for about $0.55 each, where option volume exceeds 5,000 contracts on paltry previously existing open interest of 790 lots at that strike. Put volume tipped the scales at the February $70 strike as investors exchanged more than 11,000 contracts by midday on the East coast. It looks like at least 4,400 of the puts at the February $70 strike were purchased for an average premium of $1.57 each. The buying interest at that strike indicates traders are positioning for another 5.50% decline in Toyota’s shares to the breakeven price of $68.42 ahead of expiration. Options implied volatility is up sharply as swirling bad news boosts investor uncertainty. Volatility is currently up 24.28% to 42.66%, the highest reading since May of 2009.

Zions Bancorp. (NASDAQ:ZION) – Bullish options activity on Zions Bancorporation provided a glimmer of optimism in the face of sharp share price erosion today. ZION’s shares are trading 5% lower to stand at $18.91. The light at the end of the tunnel came in the form of a call spread in the July contract. The bullish investor responsible for the transaction purchased 4,000 calls at the July $21 strike for a premium of $2.20 apiece, and sold 4,000 calls at the higher July $25 strike for about $0.90 each. The net cost of the spread amounts to $1.30 per contract. Maximum potential profits of $2.70 per contract are available to the investor if shares of the underlying stock surge 32% from the current price to $25.00 by expiration in July. The trader breaks even on the trade if ZION’s shares rise at least 18% to $21.30 ahead of expiration day.

D.R. Horton, Inc. (NYSE:DHI) – Shares of the homebuilding company are lower today by 1.60% to $13.00, paring a small portion of significant gains experienced during yesterday’s trading session. However, options activity by one investor in the August contract indicates resiliency in bullish sentiment on the stock. It looks like the optimistic investor initiated a bullish risk reversal to position for a rebound in shares within the next seven months. The reversal play involved the sale of 11,763 put options at the August $13 strike for a premium of $1.60 apiece, spread against the purchase of the 11,763 calls at the same strike for $1.80 each. The investor paid just $0.20 per contract for the transaction, and stands ready to amass potentially unlimited profits above the breakeven point at $13.20. The sale of the puts, which significantly reduced the cost of the reversal trade, indicates the trader is willing to bear the risk that shares of the underlying stock could be put to him at an effective price of $13.20 by expiration.

Bed Bath & Beyond, Inc. (NASDAQ:BBBY) – Home furnishings retailer, Bed Bath & Beyond, attracted bullish attention during the trading session despite the 1% move lower in its shares to $39.67. Investors expecting an increase in the value of the underlying by expiration in March purchased approximately 5,000 in-the-money call options at the March $39 strike for an average premium of $1.70 apiece. Call-buyers are positioned to accumulate profits to the upside if BBBY’s shares rally about 3% from the current price to surpass the breakeven point at $40.70 ahead of expiration.