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Bullish Call on Lubrizol Ahead of Deal Drives Big Payday

Posted on the 14 March 2011 by Phil's Stock World @philstockworld

 Today’s tickers: LZ, AFL, CIGX & TSL

LZ - Lubrizol Corp. – It looks like a well-timed bullish bet on Lubrizol Corp. initiated in April contract calls less than one week ago paid off big time for one options strategist following the announcement of Berkshire Hathaway’s $9 billion acquisition of the specialty-chemicals company this morning. Shares in Lubrizol Corp. shot up as much as 27.3% during the session to hit an intraday and all-time high of $134.20, which is just 80 pennies shy of the $135.00 a share deal reported today. Options volume on the stock is heaviest at the April $110 strike where one trader appears to have raked profits in off of the table within the first 20 minutes of the opening bell. Open interest patterns at that strike suggest around 2,650 calls were picked up for an average premium of $2.35 per contract back on March 9, 2011, when shares in the Lubrizol closed the session at a $106.55. The purchase of the calls, which were the closest-to-the-money contracts available at the time of the transaction, cost the investor around $622,750. Since then, news of the deal with Berkshire Hathaway sent shares in the chemical company soaring, driving up the value of the now deep in-the-money April $110 call options. It looks like the investor sold the 2,650 calls this morning at a premium of $23.90 per contract. Net profits on the sale amount to $21.55 per contract, or a grand total of $5,710,750. Lubrizol’s overall reading of options implied volatility came crashing down today, and currently stands 88.3% lower at 3.75% as of 11:35am in New York.

AFL - Aflac, Inc. – Shares in the U.S.-based insurance provider, which provides health and life insurance to a large portion of the Japanese population, fell 3.80% to $53.44 by 1:00pm in New York trading. The stock earlier declined more than 6.0% to touch down at an intraday low of $52.12. Investors bracing for further bearish movement in Aflac’s shares picked up April $50 strike put options in the first half of the session. More than 4,150 puts have traded at that strike today on open interest of 785 contracts. It looks like buyers of the put options paid an average premium of $1.03 each. Bears holding these contracts are poised to profit should shares in Aflac plunge 8.4% from the current price of $53.44 to breach the average breakeven point to the downside at $48.97 by April expiration. The rising demand for options on Aflac helped lift the stock’s overall reading of options implied volatility 14.9% to 36.86% in early-afternoon trade.

CIGX - Star Scientific, Inc. – Call options on the tobacco company that makes dissolvable smokeless tobacco products are in high demand today with shares in Star Scientific rising as much as 30.1% this morning to an intraday and new 52-week high of $3.84. Today’s surge in the price of the underlying follows as an extension of last week’s sharp increase in CIGX shares following reports regarding intellectual property lawsuits. Investors expecting shares in the name to extend gains picked up around 1,200 in-the-money calls at the April $3.0 strike for an average premium of $0.97 each. Bullish sentiment spread to the higher April $4.0 strike where some 2,470 calls changed hands versus open interest of just 188 contracts at that strike. It looks like buyers of these calls are in the majority, paying an average premium of $0.48 apiece. Investors long the April $4.0 strike call options profit should shares in Star Scientific rally another 16.7% over today’s high of $3.84 to surpass the average breakeven price of $4.48 ahead of April expiration day. Options implied volatility on Star Scientific is up 14.8% at 164.58% just before 1:00pm.

TSL - Trina Solar Limited – Shares in the solar-power products manufacturer jumped 11.3% to $26.97 today along with other solar stocks on speculation renewable energy names may benefit following the explosions at two nuclear reactors in Japan. Investors flocked to Trina Solar options to position for continued near-term bullish movement in the price of the underlying. Options players are trading more than 5 calls on the stock for each single put option in action thus far in the session. Traders purchased around 2,000 now in-the-money calls at the April $24 strike for an average premium of $3.14 per contract. Call buyers at this strike are poised to profit should shares in TSL rally another 0.65% over today’s high of $26.97 to surpass the average breakeven price of $27.14 by April expiration. More than 2,200 calls changed hands at the April $24 strike on paltry previously existing open interest of just 78 contracts.

Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com

Caitlin Duffy
Equity Options Analyst


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