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Contrarian Strategist Eyes Owens-Illinois Call Options

Posted on the 15 June 2011 by Phil's Stock World @philstockworld

Today’s tickers: OI, CAKE, XLK & HRB

OI - Owens-Illinois, Inc. – The world’s largest maker of glass bottles reduced its second-quarter profit margin forecast citing higher costs and weaker demand in Australia. The market’s reaction to the Ohio-based company’s revised estimates was swift, with shares in Owens-Illinois sliding ahead of the opening bell this morning. Shares are currently down 10.3% at $26.50 just after 11:30am on the East Coast. Despite the sharp pullback in OI’s shares today it seems the glass is still half-full for one optimistic player taking a medium-term bullish stance on the stock. The contrarian trader picked up 2,000 calls at the August $29 strike at a premium of $0.85 per contract. OI’s calls are available at a steep discount today with the August $29 strike calls trading at $0.85 today down from $1.75 apiece on Tuesday. The call buyer makes money if shares in Owens-Illinois surge 12.6% over the current price of $26.50 to surpass the effective breakeven point at $29.85 at expiration. Options implied volatility on the stock shot up 23.7% to arrive at 33.23% by 11:45am.

CAKE - The Cheesecake Factory, Inc. – Shares in the operator of casual full-service restaurants may be headed lower over the next four months according to investors initiating bearish options trades on the stock today. Cheesecake Factory’s shares are currently down 0.80% to stand at $30.54 as of 11:05am in New York. Traders employed debit put spreads in the October contract, buying 1,500 puts at the October $30 strike for an average premium of $2.20 each, and selling the same number of puts at the lower October $25 strike at an average premium of $0.62 a-pop. Bears hungry for a CAKE pullback paid an average net premium of $1.58 for the spread. Investors are poised to profit should shares in Cheesecake Factory fall another 6.9% to breach the average breakeven price of $28.42 at expiration. Maximum potential profits of $3.42 per contract fatten put spreaders’ wallets if shares plunge 18.1% to trade below $25.00 by expiration day in October. Cheesecake Factory is scheduled to report first-quarter earnings after the final bell on July 20.

XLK - Technology Select Sector SPDR – One big options player appears to have his fingers crossed for a tech-sector rally before the week is out. Shares in the XLK, an exchange-traded fund that tracks the performance of the Technology Select Sector of the S&P 500 Index, went the way of the broad market today to trade 1.45% lower on the session at $24.74 as of 11:55am in New York trade. Shares in the four largest holdings in the fund – Apple, IBM, AT&T and Microsoft – are down across the board today, as well. Bullish positioning in XLK options pushed the fund onto our ‘most active by options volume’ market scanner at the start of the trading day. It looks like one investor purchased approximately 15,000 calls at the June $25 strike for a premium of $0.10 a-pop. The value of the calls dropped sharply in the hours since the trade was initiated, and currently command a bid/ask spread of $0.02/$0.05. The call buyer makes money at expiration of the options if the price of the underlying fund increases 1.5% to exceed the effective breakeven price of $25.10. The investor will lose the full amount of premium paid for the calls – roughly $150,000 – if the options expire worthless at the end of the week. But, the position could pay off handsomely in the event of a tech-sector rally in the next couple of days.

HRB - H&R Block, Inc – Put options on the provider of tax preparation services are in demand ahead of the company’s fourth-quarter and full-year earnings release after the final bell next Thursday. Shares in H&R Block fell as much as 2.0% this afternoon to touch an intraday low of $15.46. Investors dabbling in HRB options today focused almost exclusively on July $16 strike puts. It looks like traders exchanged roughly 6,000 in-the-money puts at that strike against previously existing open interest of just 842 contracts. The majority of the put options appear to have been purchased at an average premium of $0.85 each. Put buyers profit if shares in H&R Block drop another 2.0% from today’s low of $15.46 to breach the average breakeven point on the downside at $15.15 by July expiration. Bearish players may expect shares to extend losses should earnings disappoint next week. HRB’s overall reading of options implied volatility stands 14.3% higher at 42.33% in early-afternoon trade.

Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com

Caitlin Duffy
Equity Options Analyst

 


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