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Bull Call Spreads Pop Up on Peet’s Coffee & Tea

Posted on the 16 March 2011 by Phil's Stock World @philstockworld

EWJ - iShares MSCI Japan Index ETF – A massive outright bullish play was initiated on the EWJ this morning by one player positioning for a rebound in the price of the underlying fund. Shares are currently down 2.4% at $9.81 as of 12:50pm in New York, having recovered from an earlier intra-session low of $9.24. Options volume on the EWJ, an exchange-traded fund that tracks the performance of the Japanese equity market, has topped 445,000 contracts thus far today with ample time remaining for additional activity to send that number higher. Roughly half of the volume was generated by one player who sold puts to buy call options on the fund. The spread involved the sale of 102,500 puts at the April $8.0 strike for a premium of $0.10 each, and the purchase of the same number of calls up at the April $11 strike at a premium of $0.14 a-pop. Net premium paid for the trade amounts to $0.04 per contract. The trader responsible for the transaction profits in the event EWJ shares reverse course ahead of April expiration. From an at-expiration view, profits accumulate if the price of the underlying jumps 12.5% over the current price of $9.81 to surpass the effective breakeven price of $11.04 by expiration day next month. Options implied volatility on the fund is up 41.7% at 49.46% as of 1:00pm.

 

PEET - Peet’s Coffee & Tea, Inc. – Investors are constructing bullish positions on Peet’s Coffee & Tea today with shares in the name up 4.15% at $47.91 in early-afternoon trade. Speculation that Starbucks may be interested in acquiring Peet’s Coffee inspired a flurry of options activity on the stock following a DealReporter article regarding discussions between the two companies. It looks like one or more investors are buying call spreads in the June contract to position for shares to spike to a new all-time high ahead of expiration. Investors picked up around 1,000 calls at the June $50 strike for an average premium of $3.65 each, and sold the same number of calls up at the June $55 strike for an average premium of $1.90 apiece. Net premium paid to initiate the spreads amounts to $1.75 per contract. Traders employing this strategy are poised to profit should PEET’s shares surge 8.0% over the current price of $47.91 to exceed the average breakeven point at $51.75 by June expiration. Call spreaders pocket maximum potential profits of $3.25 per contract if the share price jumps 14.8% to trade above $55.00 before the contracts expire in a few months. More than 3,300 option contracts have changed hands on Peet’s Coffee & Tea thus far in the session, which is sizable in comparison to overall open interest on the stock of 5,204 contracts. Investors are favoring calls on the stock, trading more than 11 calls for each single put option in play this afternoon.

EWJ - iShares MSCI Japan Index ETF – Investor demand for options on the Japan ETF remains strong today with the price of the underlying fund pulling back during the session as the nuclear crisis and aftermath of Friday’s earthquake and subsequent tsunami continue to unfold. Shares in the EWJ, an exchange-traded fund that tracks the performance of the Japanese equity market, fell as much as 5.5% earlier today to $9.48. More than 405,650 option contracts have changed hands on the ETF as of 12:50pm in New York. Overall open interest on the EWJ has grown by leaps and bounds since the earthquake. Overnight, open interest jumped from around 800,000 open positions to more than 1.3 million. One bearish player positioning for further weakness in the fund’s shares initiated a put butterfly spread today. It looks like the trader purchased 13,600 puts at the April $9.0 strike for a premium of $0.28 each, sold 27,200 puts at the April $8.0 strike at a premium of $0.11 apiece, and purchased 13,600 puts at the lower April $7.0 strike for a premium of $0.05 a-pop. The net cost of the put ‘fly play amounts to $0.11 per contract, and positions the trader to make money should shares in the fund fall another 6.2% off today’s low of $9.48 to breach the effective breakeven price of $8.89 by expiration next month. Maximum potential profits of $0.89 per contract pad the investor’s wallet if shares in the EWJ plunge 15.6% to settle at $8.00 at expiration. Shares in the fund have not traded below $9.00 since May of 2009.

ENDP - Endo Pharmaceuticals Holdings, Inc. – Call activity on the maker of branded and generic prescription drugs this morning suggests one strategist expects shares in Endo Pharmaceuticals are unlikely to rally much ahead of April expiration. ENDP’s shares are currently down 1.75% to stand at $33.85 as of 11:20am in New York. The pessimistic player appears to have sold a call spread, taking in and keeping the credit on the transaction as long as shares in Endo fail to break above $35.00 through expiration day next month. It looks like the investor sold 2,000 calls at the April $35 strike for a premium of $1.33 each, and purchased the same number of calls at the higher April $40 strike at a premium of $0.33 apiece. The investor pockets a net credit of $1.00 per contract on the spread, and retains the full amount of premium as long as the April $35 strike calls expire worthless at expiration. The bearish play limits losses to the upside with the purchase of the higher-strike call options, but the investor will start to lose money if the price of the underlying exceeds the effective breakeven price of $36.00 ahead of expiration. The credit spread could result in maximum potential losses of $4.00 per contract in the event that ENDP’s shares surge 18.2% to trade above $40.00 by expiration in April.

CVC - Cablevision Systems Corp. – Investors initiated bearish positions in Cablevision options this morning with shares in the U.S. cable operator trading 0.95% lower on the session to arrive at $34.58 just before 11:40am. Traders appear to be replicating strategies employed on CVC in the front month during trading on Tuesday. More than 2,850 calls at the March $35 strike sold for an average premium of $0.23 per contract today. Open interest patterns at that strike suggest investors received $0.32 premium on the sale of some 2,500 of the calls yesterday. Call sellers keep the premium pocketed on the trade as long as shares in Cablevision trade below $35.00 through expiration at the end of the week. If the calls sold at that strike this morning and on Tuesday are uncovered, investors amass losses in the event that shares in CVC reverse course to surpass the breakeven prices of $35.23 and $35.32, respectively.

FSLR - First Solar, Inc. – Shares in the manufacturer of renewable energy equipment continued their run up today in the face of mounting fears stemming from the nuclear crisis that continues to unfold in Japan. Bulls anticipating greater demand for energy generated via solar and wind sources continued to drive up shares in various renewable energy stocks today. First Solar’s shares rallied as much as 6.6% today to secure an intraday high of $156.63. The stock gained around 13.5% since Friday’s opening price of $137.95. Analysts at Morgan Stanley cited First Solar as one name well positioned to benefit from the push for additional renewable capacity over the next decade, which likely helped drive shares higher, as well. Near-term bulls were most active during the current session. Traders positioning for the uptrend to extend at least through March expiration on Friday picked up more than 2,300 calls at the March $155 strike for an average premium of $2.52 each. Optimism spread to the higher March $160 strike where another 1,400 call options were purchased at an average premium of $0.96 each. Bulls also looked to the March $165 strike to buy around 2,200 calls for an average premium of $0.54 per contract. Investors long the March $165 strike calls profit if shares in First Solar increase another 5.7% over today’s high of $156.63 to trade above the average breakeven price of $165.54 by expiration. More than 46,500 contracts have changed hands on the stock as of 1:25pm.

HD - Home Depot, Inc. – Large prints in Home Depot call options appear to be the work of an investor rolling a bullish stance on the provider of home construction goods and services out a few months. Shares in the Atlanta, GA-based firm are down slightly by 0.85% to arrive at $36.37 in early-afternoon trade. The investor appears to have originally constructed a bullish position on Home Depot by purchasing 10,000 in-the-money calls at the March $36 strike for a premium ranging from $1.64 to $1.85 per contract back on January 28, 2011, when the price of HD shares closed at $37.89. The decline in the price of Home Depot’s shares, coupled with the effects of time erosion since the calls were purchased, dragged premium on the contracts down. The investor sold all 10,000 contracts for a premium of $0.58 each this morning, and opened the bullish stance once more up at the May $37 strike. The trader paid a premium of $1.25 per contract for 10,000 of the May $37 strike call options. In isolation, profits start to amass on the fresh bullish stance should shares in HD rally 5.2% over the current price of $36.37 to surpass the breakeven point on the upside at $38.25 by May expiration day. Home Depot reports first-quarter earnings ahead of the opening bell on May 17, 2011, just three days ahead of expiration for May option contracts.

 


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