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Bullish Speculator Hits the Mark with Cheniere Energy Strategy

Posted on the 23 May 2011 by Phil's Stock World @philstockworld

Today’s tickers: LNG, WMB, KKD & LVS

LNG - Cheniere Energy, Inc. – How much would you be willing to pay for call options with five months to expiration to gain the right to buy a $7.74 stock for $12.00 a share? In the case of Cheniere Energy, one bullish strategist was willing to pay an average of $0.82 per contract, a total price tag of approximately $1.64 million, for some 20,000 September $12 strike calls back on April 14. Shares in LNG at that time had fallen 23.0% since the previous week to trade around $7.74 on the date the calls were purchased. The sizable bullish play on LNG last month left us to consider what the impetus behind such a trade might be, as well as what might be expected to drive shares up 55.0% in the five months to expiration. On Friday shares in the liquefied natural gas (LNG) provider surged 44.5% to $11.11 on news the company received government approval to export fuel to more countries. Cheniere’s shares rallied as much as 15.3% over Friday’s high of $11.11 to touch today’s intraday- and new 52-week high of $12.81 on news of the approval. Whether the call buyer was speculating on a post-export approval rally or not is unknown and perhaps rather unimportant at this point. The decision to buy the calls outright for an average premium of $0.82 per contract has, for the time being, proven well worth the initial cost. September $12 strike calls on Cheniere Energy cost as much as $2.85 per contract this morning, that’s roughly 3.5 times as much as the investor paid for the options back in April. The initial play saw the speculator layout $1.64 million, which today was worth as much as $5.7 million. Open interest of 21,483 calls at the September $12 strike suggests the investor is not surprised by the jump in value and as such shows no signs of closing the position just yet. At expiration, the trader profits as long as shares in LNG exceed the average breakeven price of $12.82. Options implied volatility on LNG is down 7.2% to stand at $79.60% as of 12:05pm in New York.

WMB - Williams Cos., Inc. – Another natural gas industry player on our options radar today is Williams Companies. Shares in the Tulsa, OK-based company are down 1.3% today to stand at $30.36, but it looks like one options player expects shares to increase substantially by November expiration. The bullish strategist initiated a ratio call spread, buying 5,200 calls at the November $32 strike at a premium of $2.04 each, and selling 10,000 calls up at the November $40 strike for a premium of $0.41 apiece. Net premium paid to initiate the spread amounts to $1.22 per contract, thus positioning the investor to profit should shares in WMB surge 9.4% over the current price of $30.36 to exceed the effective breakeven price of $33.22 by expiration day in November. Maximum potential profits of $6.78 per contract are available to the trader in the event that Williams’ shares jump 31.2% in the next six months to settle at $40.00 at expiration. The ratio of twice as many short calls works in the investor’s favor by lowering the share price at which he breaks even, but could work against him if his expectations for how high the stock might climb end up being too conservative. Premium accrued on the spread should shares reach $40.00 and head higher protect the trader from losses, but such protection runs out and turns into losses if the stock soars 54.1% to surpass the upper breakeven price of $46.78 at expiration in November. WMB’s shares traded above the $33.22 breakeven price as recently as May 2, 2011, and haven’t topped $40.00 since July 2008.

KKD - Krispy Kreme Doughnut Corp. – Shares in the delicious donut maker jumped 25.6% today to a high of $8.04 (and rising) after the Winston-Salem, NC-based company reported sweeter-than-expected first-quarter earnings ahead of the opening bell. Krispy Kreme joined the ranks of our ‘hot by options volume’ market scanner early on in the trading session following heavy call activity in the August contract. It looks like 2,000 now in-the-money calls sold for an average premium of $0.675 apiece at the August $7.5 strike, while an identical number of calls were purchased at the higher August $10 strike at a premium of $0.10 each this morning. The trader responsible for the transaction may be rolling a previously established bullish stance on the donut retailer up to a higher strike to extend optimism on the stock. Open interest in the August $7.5 strike calls at 6,067 contracts is more than sufficient to cover the day’s volume. Patterns in the open interest suggest that around 2,000 calls were purchased at that strike back on April 11, 2011, for an average premium of $0.20 each. If the investor is selling-to-close the original position to buy the higher strike calls, net profits on the initial bullish stance amount to an average of $0.475 per contract. The new bullish stance then positions the trader to add to profits should the stock rally another 25.6% over the current price of $8.04 to surpass the effective breakeven price of $10.10 by expiration day in August. Options implied volatility on KKD dropped 16.9% this afternoon to 47.16% post earnings.

LVS - Las Vegas Sands, Inc. – Options on the resort casino operator reveal mixed sentiment from traders populating the stock today. Shares in Las Vegas Sands fell as much as 3.7% during the session thus far to touch an intraday low of $40.21. Bearish players appear to be buying put options or selling out-of-the-money calls on LVS, while investors hoping today’s pullback represents an opportune time to get in on the casino company are buying in- and out-of-the-money calls as well as selling put options. Fresh positioning in the weeklies on LVS reveals some bullish traders are getting long the May $40 and May $41 strike calls at average premiums of $1.04 and $0.48, respectively. A rebound in Las Vegas Sands’ shares ahead of expiration on Friday could make for an extra-enjoyable long weekend for near-term bulls long the calls. Meanwhile, two-way trading traffic in the May $40 and $41 strike put options indicates there are those positioning for further declines in the stock, as well as traders placing a floor on how low they expect the share price to go by expiration. Options volume on Las Vegas Sands is heaviest by far in the June contract. Call sellers up at the June $44, $45 and $46 strikes may be taking outright bearish stances on the stock or throwing in the towel on previously established bullish positions. Put buyers targeted the June $40 strike as well as the June $39 strike, but put volume is most notable at the June $38 strike where more than 11,400 contracts changed hands today. It looks like the majority of these contracts sold for an average premium of $0.60 each. Open interest at this strike exceeds volume generated during the session. If investors are selling-to-open these positions, the full premium of $0.60 per contract is safe in their wallets as long as shares in LVS trade above $38.00 through June expiration. Traders have exchanged more than 72,900 option contracts on the casino operator as of 2:05pm in New York.

Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com

Caitlin Duffy
Equity Options Analyst

 

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