Business Magazine

Bullish Player Goes for Second Helping of Kraft Call Options

Posted on the 20 May 2011 by Phil's Stock World @philstockworld

Today’s tickers: KFT, GG, AEO & STEC

KFT - Kraft Foods, Inc. – Retail-therapy may be less attractive today following disappointing reports from industry giants such as The Gap, Inc., but options traders are still managing to enhance bullish spirits by turning to food instead. Kraft Foods popped up on our scanners today due to heavy trading traffic in June contract call options. It looks like one player is extending optimism on the stock, having purchased call options on Kraft five weeks prior, on April 15. Shares in Kraft Foods increased as much as 1.3% this afternoon to touch an intraday and new 52-week high of $35.44. It appears the investor purchased June $34 strike calls five weeks ago for an average premium of $0.40 per contract when shares in the name were hovering around $33.29. Kraft’s shares rallied 6.45% in the past five weeks to touch today’s new 52-week high, but the value of the June $34 strike calls has increased more than three-fold during the same time period. Some 7,000 call options at the June $34 strike were sold today for an average premium of $1.46 each. If we assume the call seller and buyer are one and the same, net profits on the position amount to $1.06 per contract. Next, it looks like a fresh batch of roughly 7,000 call options were purchased up at the higher June $36 strike for an average premium of $0.25 per contract. Profits on the fresh bullish stance kick in at expiration next month as long as Kraft’s shares rally another 2.3% to exceed $36.25 within the next six weeks. Other bullish players purchased some 1,400 in-the-money calls at the June $33 strike for an average premium of $2.44 each. Another strategist appears to be ditching a bearish position on Kraft Foods by unraveling a ratio put spread in the September contract. Options implied volatility on Kraft trimmed 3.5% to stand at 31.33% this afternoon.

GG - Goldcorp, Inc. – Options traders are initiating bullish stances on the world’s second-largest gold producer by market value today with shares in Vancouver, BC-based Goldcorp rising as much as 1.8% during the session to an intraday high of $49.22. One strategist positioning for shares in GG to trend higher over the next five months purchased a call spread in the October contract. It looks like the investor picked up 2,000 calls at the October $50 strike for a premium of $2.97 each, and sold the same number of calls up at the October $55 strike for a premium of $1.50 apiece. Net premium paid to initiate the spread amounts to $1.47 per contract. Thus, the trader profits if shares in Goldcorp rally another 4.6% over today’s high of $49.22 to surpass the effective breakeven price of $51.47 by expiration day in October. Maximum potential profits of $3.53 per contract are available to the call-spreader should shares in GG surge 11.7% to trade above $55.00 at expiration. Goldcorp’s shares hit a 52-week high of $56.20 on April 28 before sliding lower with the pullback in metals prices.

AEO - American Eagle Outfitters, Inc. – Disappointing profit forecasts from the largest U.S. apparel chain, The Gap, Inc., as well as teen retailer Aeropostale, Inc. on Thursday are weighing down shares in American Eagle Outfitters today. Shares in AEO fell as much as 7.9% this morning to touch down at an intraday low of $13.46. Bearish options traders were quick to take positions in American Eagle today with the teen retailer’s first-quarter report scheduled for Wednesday ahead of the opening bell. Investors buying puts and selling call options on AEO today are likely to benefit post-earnings should the company’s performance in the quarter and forecasts for future results disappoint. Bears sold more than 1,000 call options at the June $14 strike for a premium of $0.60 each. Call sellers keep the full amount of premium received on the transaction as long as AEO’s shares fail to rally above $14.00 through June expiration. Investors selling the calls may be taking advantage of the sharp rise in implied volatility on the stock, which is currently up 16.6% at 47.26% as of 12:30pm in New York. Meanwhile, put players purchased roughly 2,700 now in-the-money contracts at the June $14 strike for an average premium of $0.71 a-pop. Put buyers make money if shares in AEO slip beneath the average breakeven price of $13.29 at expiration next month. Bearish sentiment spread to the lower June $13 strike where some 1,500 puts were picked up at an average premium of $0.33 apiece. Traders holding these options make money in the event that American Eagle shares fall another 5.9% from today’s low of $13.46 to breach the average breakeven point on the downside at $12.67 by June expiration day. Investors are trading roughly 3.6 put options on the teen retailer for each single call in play today.

STEC - STEC, Inc. – Options activity on the provider of products to storage and server equipment manufacturers was heavier-than-usual this morning with the price of the underlying stock soaring 14.5% to as high as $16.86. Investors employed a number of bullish trading tactics in STEC options, with a number of players picking up calls and others selling in- and out-of-the-money puts on the stock. Traders expecting shares in STEC to rise ahead of expiration next month purchased around 1,500 calls at the June $19 strike for an average premium of $0.25 a-pop. Call buyers at this strike make money if shares surge 14.2% over today’s high of $19.25 to exceed the average breakeven price of $19.25 by expiration in June. Out in the November contract, traders focused their attention on in- and out-of-the-money put options. Fresh positions, as evidenced by the excess of today’s volume over previously existing open interest, were initiated in the November $16, $17 and $18 strike puts. More than 2,000 in-the-money puts changed hands at the November $18 strike against open interest of 193 contracts. It looks like at least half of the contracts sold for an average premium of $3.55 a-pop. Investors short the puts keep the entire premium received on the sale as long as STEC’s shares are trading above $18.00 by November expiration. Traders selling the puts could have the stock put to them at an effective price of $14.45 each in the event that the put options land in-the-money and are exercised at expiration. Similar selling patterns were observed at the November $16 and $17 strikes as well, albeit in exchange for a lesser premium.

Andrew Wilkinson
Senior Market Analyst

Caitlin Duffy
Equity Options Analyst


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