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Bulls Prepping for a Rally Don Red Hat Call Options

Posted on the 13 July 2011 by Phil's Stock World @philstockworld

Today’s tickers: RHT, MDRX, CQB & DOW

RHT - Red Hat, Inc. – Options activity in December contract calls on the world’s leading provider of open source solutions suggests shares in Red Hat may rally more than 10.0% to their highest in more than a decade by the end of 2011. The stock gained 1.80% this afternoon to trade at $44.57 by 12:30 pm on the East Coast, paring some losses realized earlier in this week. In the previous four weeks Red Hat’s shares moved up 17.0% on strong first-quarter earnings as well as analyst upgrades. Bullish strategists expecting the company’s shares to extend gains purchased around 4,390 call options at the December $46 strike on open interest of just 242 contracts. Traders paid an average premium of $3.40 per contract and stand ready to profit should Red Hat’s shares surge 10.8% over the current price of $44.57 to exceed the average breakeven point to the upside at $49.40 by expiration day in December. The Raleigh, NC-based company reports second-quarter earnings after the market closes on September 22. Call buyers may see the value of their positions sky-rocket if Red Hat’s second-quarter results send the price of the underlying skyward.

MDRX - Allscripts-Misys Healthcare Solutions, Inc. – Allscripts shares rose 1.1% to $19.96 this morning after the company said it expects adjusted earnings and revenues for the second quarter to come in better than analysts’ estimates. Despite positive comments from the Chicago, IL-based company, it looks like some options traders are positioning for shares in the healthcare information services company to pullback ahead of August expiration. Allscripts reports second-quarter earnings on August 4. MDRX shares rose 9.1% in the past two weeks, but put buyers populating the stock today are prepared to benefit should shares erase recent gains in the next five weeks. It looks like investors exchanged more than 4,000 puts at the August $20 strike against previously existing open interest of just 39 contracts. Most of the puts appear to have been purchased for an average premium of $0.83 a-pop. Traders long the puts profit in the event that shares in MDRX decline 3.95% from the current price of $19.96 to breach the average breakeven point on the downside at $19.17 at August expiration. The overall reading of options implied volatility on MDRX is up 11.8% to stand at 36.80% as of 12:00 pm ET.

CQB - Chiquita Brands International, Inc. – Bullish investors took a bite out of Chiquita call options this morning with shares in the international distributor and marketer of bananas, fresh fruit and packaged produce rising 3.95% to $12.93 by 12:15 pm in New York. Traders expecting shares in Chiquita to extend gains over the next several months looked to the November $13 strike, trading more than 3,000 calls at that strike against open interest of 15 contracts. Time and sales data suggests the majority of the call options were purchased for an average premium of $1.16 each. Call buyers profit if shares in CQB surge 9.5% to exceed the average breakeven price of $14.16 at expiration in November. Shares in Chiquita Brands last traded above $14.16 at the beginning of June. The stock’s current price of $12.93 represents a 34.3% discount from CQB’s 52-week high of $17.36 on February 28. Implied volatility on the provider of fresh produce currently stands 8.1% higher on the day at 47.92% in early-afternoon trade. The company is slated to report second-quarter earnings after the final bell on July 28.

DOW - Dow Chemical Co. – Put selling on Dow Chemical in the first 30 minutes of the trading session suggests shares are unlikely to decline in the immediate future. It looks like one strategist sold a large chunk of put options in the front month to pocket available premium in the expectation that DOW’s shares may exceed $34.00 through July expiration on Friday. Shares in the manufacturer of chemical, plastic and agricultural products increased as much as 1.3% earlier in the session to secure an intraday high of $34.50. More than 10,000 put options changed hands at the July $34 strike this morning against 3,370 previously existing open positions. The bulk of the volume appears to be the work of one trader selling some 7,000 of the puts at that strike at a premium of $0.34 apiece. The put seller keeps the full amount of premium as long as shares in Dow Chemical Co. exceed $34.00 and the put options expire worthless at expiration on Friday. The investor runs the risk of having 700,000 shares of the underlying stock put to him at an effective price of $33.66 each – after accounting for premium received on the sale of the options – if the puts are exercised against him come expiration day. Shares in Dow Chemical currently trade more than 22.0% below the stock’s 52-week high of $42.23 achieved on May 2. The investor may be happy to take delivery of the shares at $33.66, which would represent a 25% discount off the stock’s highest price of the past 52 weeks, or to walk away with the $0.34 per contract premium in hand when the contracts expire. Dow Chemical reports second-quarter earnings ahead of the open on July 27.

Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com

Caitlin Duffy
Equity Options Analyst

 

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