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Appetite for Darden Calls and Puts Grows Ahead of Earnings

Posted on the 29 June 2011 by Phil's Stock World @philstockworld

Today’s tickers: DRI, MGM, CSTR & RMD

DRI - Darden Restaurants, Inc. – Investors are dining on both call and put options on the operator of Red Lobster and Olive Garden restaurants today ahead of the company’s fourth-quarter earnings report tomorrow after the close of trading. Shares in one of the world’s largest company-owned and operated full-service restaurant companies are up 0.70% this afternoon to stand at $49.60. The rise in demand for options on the stock helped lift DRI’s overall reading of options implied volatility 13.3% to 31.00% by 1:00pm in New York. Traders gearing up for a post-earnings rally purchased more than 2,000 calls at the July $50 strike for an average premium of $1.05 a-pop. Call buyers make money in the event that Darden’s shares rise 2.9% to trade above the average breakeven price of $51.05 through July expiration day. Bullish sentiment on the stock spread to the August $55 strike where investors scooped up 1,400 calls at an average premium of $0.30 per contract. Traders long the calls profit at August expiration if shares in DRI soar 11.5% to exceed the average breakeven price of $55.30. Of course, investors may be able to sell the calls ahead of expiration if a post-earnings rally in the price of the underlying shifts call premium in their favor. Not all options players are hungry for a rally. It looks like traders positioning for a near-term pullback in Darden’s shares paid an average premium of $1.30 per contract to pick up around 2,400 puts at the July $49 strike. Put buyers profit if shares in the restaurant operator tumble 3.8% to breach the average breakeven point on the downside at $47.70 at expiration next month. More than 9,500 options have changed hands on Darden Restaurants, Inc. as of 1:05pm on the East Coast.

MGM - MGM Resorts International – Options activity on the operator of casino resorts suggests one strategist is betting on a sharp rise in MGM’s shares by January 2012 expiration. Shares in the Las Vegas, NV-based company increased as much as 2.5% earlier in the session to touch an intraday high of $13.28. The bullish player appears to have initiated a debit call spread, buying 5,000 in-the-money calls at the Jan. 2012 $12.5 strike for a premium of $2.20 each, and selling the same number of calls up at the Jan. 2012 $16 strike at a premium of $0.80 apiece. Net premium paid to initiate the spread amounts to $1.40 per contract. Thus, the trader stands ready to profit in the event that MGM’s shares rally 4.7% over today’s high of $13.28 to surpass the effective breakeven price of $13.90 by expiration day next year. Maximum potential profits of $2.10 per contract are available to the call-spreader if the price of the underlying jumps 20.5% in the next 7 months to trade above $16.00 at expiration in January. Shares in the casino operator were trading as high as $16.94 this past January, and recently dipped to a 6-month low of $11.78 in June. MGM Resorts International is slated to report second-quarter earnings ahead of the opening bell on August 3.

CSTR - Coinstar, Inc. – Investors populating Coinstar options today are positioning for shares in the provider of bulk vending machines, self-service DVD kiosks and electronic payment services to increase substantially in the next couple of months. Shares rallied as much as 3.5% in the first half of the session to an intraday high of $53.27. Bullish traders scooped up August contract calls and engaged in light put selling on CSTR, perhaps to position for a positive earnings surprise following the company’s second-quarter report on July 28. It looks like traders purchased more than 500 calls at the August $55 strike for an average premium of $2.49 a-pop. Investors long the calls profit if CSTR’s shares climb 7.9% to exceed the average breakeven price of $57.49 by expiration day. Trading traffic in Coinstar options is heaviest up at the August $57.5 strike where more than 2,400 calls changed hands this morning. It looks like the majority of the calls were likely purchased at an average premium of $1.59 each. Call buyers stand prepared to profit should the price of the underlying stock surge 10.9% to surpass the average breakeven point to the upside at $59.09 come expiration. Other optimistic options players sold roughly 150 to 200 puts at the August $55 and $52.5 strikes to pocket $4.91 and $3.60 in premium per contract, respectively. Put sellers keep the full amount of premium as long as the put options expire worthless at expiration in August. Traders short the puts are prepared to take delivery of Coinstar stock should the puts land in-the-money.

RMD - ResMed, Inc. – A large transaction in July contracts put options pushed San Diego, CA-based ResMed onto our ‘hot by options volume’ market scanner today. Shares in the maker of medical equipment to treat sleep-disordered breathing and other respiratory disorders increased 1.8% this afternoon to $30.70. Although options players focused their efforts almost exclusively on ResMed puts, it looks like the contracts were sold suggesting traders are near-term bullish on the stock. Options volume generated on RMD today is nearly 2.5 times the number of open positions on the stock of 2,506 contracts. All but 154 of the more than 6,150 options traded on ResMed thus far in the session changed hands at the July $30 strike. It looks like some 6,000 of the July $30 strike puts sold for an average premium of $0.37 apiece. Put sellers keep the premium received on the transaction as long as shares in RMD exceed $30.00 through expiration day next month. Traders short the puts could wind up have shares of the underlying put to them at an effective price of $29.63, on average, in the event that the options land in-the-money at expiration. The puts expire ahead of ResMed’s fourth-quarter earnings report on August 4. Options implied volatility on the stock slipped 5.3% lower this afternoon to 27.46%.

Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com

Caitlin Duffy
Equity Options Analyst

 


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