Wednesday Options Brief: VLO, EBAY, TMO & TRGT

Includes: CBIO, EBAY, TMO, VLO
by: Interactive Brokers

Valero Energy Corp. (NYSE:VLO) Reports of takeover chatter fueled frenzied trading in Valero Energy Corp. options, with volume in VLO topping 83,000 contracts by 12:05 pm in New York. Shares in the producer of gasoline, jet fuel and other refined products surged 11.1% to $24.28 in early-afternoon trade. Call options are changing hands at a rate of more than three contracts to each single put option in play on the stock. November and December contracts are the most heavily trafficked thus far in the session, although options plays are present in each available expiry. While trading in Nov. and Dec. calls is mixed, there does appear to be a bullish bias to the transactions. Investors snapped up calls at the Nov. $24, $25, $26 and $27 strikes to position for continued bullish movement in the price of the underlying through expiration next month. The Nov. $25 strike call has generated the most volume, with more than 3,500 contracts having changed hands so far today. It appears buyers of the Nov. $25 strike call picked up more than 1,800 lots for an average premium of $0.99 each. Traders long the contracts may profit at expiration day if shares in VLO rally another 4.7% to surpass the average breakeven price of $25.99. Investors hoping to see sharp gains in the stock over the next few weeks purchased around 515 calls up at the Nov. $31 strike for an average premium of $0.09 each. Premium paid to get long the calls may be lost and gone forever in the event that shares are trading below those levels come expiration day in a few weeks time. Valero Energy Corp. is scheduled to report third-quarter earnings before the opening bell on November 1.

eBay, Inc. (NASDAQ:EBAY)Bearish activity in eBay, Inc. options this morning suggests one strategist may profit if shares in the provider of online marketplaces and secure payment services decline substantially within the next four weeks. Meanwhile, trading traffic in November contract call options may be the work of an investor throwing in the towel on hopes for a sharp near-term rally in the price of the underlying. Shares in EBAY slipped 2.75% to $30.80 by 11:30 am in New York. Volume in eBay’s options is heaviest at the Nov. $29 strike, where it appears one trader purchased around 6,000 puts for an average premium of $0.45 each, against open interest of 1,933 contracts. The put player profits at expiration next month if shares in eBay drop 7.3% to breach the average breakeven point on the downside at $28.55. The stock last traded below $28.55 on October 4. Finally, the sale of approximately 2,000 Nov. $33/$35 call spreads at an average net premium of $0.50 each may represent one trader’s decision to cut a previously established bullish position loose. Call open interest at both strikes is sufficient to cover volume generated this morning. Options implied volatility on the stock rose 3.5% to 40.69% in the first half of the trading day.

Thermo Fisher Scientific Inc. (NYSE:TMO) Call selling ensued on Thermo Fisher Scientific this morning after the company lowered its full-year earnings and revenue estimates. Shares in the medical equipment maker plunged more than 10.0% in the first half of the session to a fresh 52-week low of $47.77 on news of the lowered guidance from the company. Near-term bears expecting shares in TMO to remain trapped below $50.00 over the next several weeks sold roughly 1,600 calls at the Nov. $50 strike for an average premium of $1.85 a-pop. Call sellers walk away with premium in hand at November expiration as long as shares in Thermo Fisher fail to rally above $50.00. Bearish sentiment spread to the Dec. $50 strike where another 700 calls appear to have been sold for an average premium of $2.29 each. Investors responsible for the call selling may or may not hold shares in the underlying stock. Naked short positions in the $50 strike call options indicates loss exposure for sellers should TMO’s shares rebound and exceed the average breakeven prices of $51.85 and $52.29, by November and December expiration, respectively.

Targacept, Inc. (TRGT) A sizable bull call spread initiated on Targacept today may yield big profits to its owner if shares in the biopharmaceutical company realize double-digit gains in the coming weeks. Shares in TRGT are currently up 1.7% at $17.50 as of 12:50 pm EDT, with less than one week to go before the company reports earnings for the third quarter. The investor responsible for most of the activity in TRGT options today appears to have purchased a 5,000-lot Nov. $22.5/$35 call spread at a net premium of $2.00 per contract. The trader may profit at expiration if the price of the underlying soars 40.0% to surpass the effective breakeven price of $24.50. Maximum potential profits of $10.50 per contract pad the investor’s wallet in the event that Targecept’s shares double to top $35.00 by November expiration.