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Bearish Players Eye Men’s Wearhouse Put Options Ahead of Earnings

Posted on the 08 June 2011 by Phil's Stock World @philstockworld

Today’s tickers: MW, ABV, ANR & ODP

MW - The Men’s Wearhouse, Inc. – Investors are posturing in Men’s Wearhouse put options this afternoon ahead of the retailer’s first-quarter earnings report after the final bell. Shares in the Houston, TX-based company are well off their lows of the session, but still trade 0.65% lower today at $30.61 as of 1:35pm on the East Coast. One options strategist donned a debit put spread in the June contract to position for the price of the underlying shares to fall. The trader picked up 1,500 puts at the June $30 strike for a premium of $1.25 each, and sold the same number of puts at the lower June $28 strike at a premium of $0.47 a-pop. Net premium paid to initiate the spread amounts to $0.78 per contract. The investor profits if shares in Men’s Wearhouse drop 4.5% post-earnings to breach the effective breakeven price of $29.22. Maximum potential profits of $1.22 per contract pad the investor’s wallet in the event that MW’s shares plunge 8.5% in the next week and a half to trade below $28.00 at June expiration. Options implied volatility on the clothing company currently stands 7.7% higher on the session at 50.64%. Investors have exchanged a total of 6,295 call and put options on the stock as of 1:40pm, which is substantial relative to MW’s total open interest of 11,578 contracts. Pre earnings report options players are exchanging more than 3.5 put options on the stock for each single call option on the retailer this afternoon.

ABV - AmBev – Shares in AmBev, a subsidiary of global brewing company Anheuser-Busch InBev, rose nearly 1.1% at the start of the trading session to $31.94. Activity in AmBev call options this morning suggests one strategist expects shares in the biggest brewery in South America to increase significantly ahead of October expiration. It looks like the bullish player initiated a ratio call spread to position for substantial, albeit limited, gains in the price of the underlying. The trader purchased 1,000 calls at the October $31.99 strike for a premium of $2.00 each, and sold 2,000 calls up at the October $34.99 strike at a premium of $0.80 apiece. The sale of twice as many of the higher-strike call options cuts the net cost of the transaction down to a net premium of $0.40 per contract. Thus, the investor profits if shares in the beverage producer rally another 1.4% over today’s high of $31.94 to surpass the effective breakeven price of $32.39 by expiration day. Maximum potential profits of $2.60 per contract are available to the trader should shares in AmBev surge 9.5% to settle at $34.99 at expiration. ABV’s shares recently touched an all-time high of $33.24 on May 9, 2011, marking a more than 350.0% run-up in the price of the underlying since its October 2008 low of $6.01. The ratio call-spreader could benefit from limited upside movement in ABV’s shares in the months ahead. But, the greater number of short calls at the October $34.99 strike may result in losses to the trader if the stock jumps 17.7% to exceed the upper breakeven price of $37.59 by expiration in October.

ANR - Alpha Natural Resources, Inc. – Shares in the coal producer fell 2.0% this afternoon to $47.28, adding to the now 14.3% pullback in the price of the underlying stock since the company completed its $7.1 billion acquisition of Massey Energy last Wednesday. Activity in September contract calls this morning indicates medium-term bullish sentiment on Alpha Natural Resources. It looks like one investor initiated a debit call spread, buying 7,500 calls at the September $50 strike for a premium of $3.13 each, and selling the same number of calls up at the September $60 strike at a premium of $0.84 apiece. The trader paid a net premium of $2.29 per contract for the spread. The investor breaks even on the position if shares in the coal company rebound 10.6% off the current price of $47.28 to surpass the effective breakeven point at $52.29 by September expiration. Maximum potential profits of $7.71 per contract are available on the position should shares in ANR jump 26.9% in the next few months to exceed $60.00 at expiration day.

ODP - Office Depot, Inc. – Call options on the office supplies retailer are active today, with most of the volume building in the July contract. Shares are currently down 1.1% to stand at $3.56 as of 1:05pm in New York, having pared earlier declines of 6.9% to an intraday- and new 52-week low of $3.35. The stock has tumbled 44.6% since the start of 2011. Fresh positioning in the July $3.5 strike calls appears to be the work of traders expecting the stock to rebound somewhat by expiration next month. Investors exchanged more than 11,000 calls at the July $3.5 strike on previously existing open interest of 5,214 contracts. Open interest in the calls jumped following Monday’s trading session. It looks like most of the calls were purchased at the start of the week for $0.35 apiece. Investors buying nearly all of the 11,000 calls exchanged at the July $3.5 strike today paid an average premium of $0.25 per contract. Call buyers stand ready to profit should shares in Office Depot increase 5.3% over the current price of $3.56 to surpass the average breakeven point on the upside at $3.75 by expiration day. Call buying spread to the July $4.5 strike where some 8,000 calls traded on the offer for an average premium of $0.10 each. Open interest at this strike is sufficient to cover volume generated today. Trading in October contract calls is heavier than usual today, as well. Buyers scooped up calls at the October $4, $4.5 and $5.0 strikes, trading more than 9,700 options at the $4.5 strike on open interest of 2,948 contracts. The rise in demand for ODP call options helped drive a 50.4% rise in the overall reading of options implied volatility on the stock to 84.96% this afternoon.

Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com

Caitlin Duffy
Equity Options Analyst

 


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