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Contrarian Traders Eye Call Options on Walter Investment Management Corp.

Posted on the 28 March 2011 by Phil's Stock World @philstockworld

 Today’s tickers: WAC, XLE, HIG & LLNW

WAC - Walter Investment Management Corp. – Shares in the mortgage servicer and investor dropped 12.9% today to touch down at an intraday low of $16.80 on news the company is buying Green Tree for $1.065 billion including debt. Walter Investment Management Corp. will no longer qualify as a real estate investment trust after the deal closes. The sharp decline in Walter’s shares attracted long term bullish traders to the options playing field this morning. Investors expecting WAC’s shares to make a full recovery, and potentially secure new 52-week highs ahead of September expiration, purchased out-of-the-money calls on the stock. Bulls picked up around 137 calls at the September $18 strike for an average premium of $0.98 each, and bought another 209 calls up at the September $19 strike at an average premium of $0.63 apiece. Trading traffic is heaviest at the September $20 strike where more than 3,300 calls changed hands on paltry previously existing open interest of 204 contracts. Most of the calls at the September $20 strike were purchased for an average premium of $0.43 a-pop. Call buyers profit in the event that Walter’s shares surge 21.6% to trade above the average breakeven price of $20.43 in the six months remaining to expiration. WAC’s shares were trading up at a 52-week high of $20.22 as recently as March 9, 2011. Options implied volatility on the stock spiked 32.3% higher in early-afternoon trade to arrive at 26.76% just before 12:15pm.

XLE - Energy Select Sector SPDR ETF – Investors are trading approximately 11 put options on the Energy SPDR this afternoon for each single call option in play on the fund with shares in the XLE rising 0.90% during the session to secure yet another new multi-year high of $79.40. The largest transaction on the XLE, an exchange-traded fund that tracks the performance of the Energy Select Sector of the S&P 500 Index, was initiated in the September contract. An investor positioning for an eventual pullback in the price of the underlying purchased the 10,000-lot September $70/$77 strike put spread for a net premium of $2.33 per contract. The put player profits, or realizes downside protection, in the event that shares in the XLE fall around 6.0% from today’s high of $79.40 to breach the effective breakeven point on the spread at $74.67 ahead of September expiration. Maximum potential profits of $4.67 per contract are available to the investor should shares in the ETF plunge 11.8% in the next six months to trade below $70.00 by expiration day. Shares in the XLE have traded above $70.00 since January 26, 2011.

HIG - Hartford Financial Services Group, Inc. – Call options on the Connecticut-based insurance products and financial services company are in high demand this morning with shares rising as much as 2.3% to $27.33 on reports of renewed takeover chatter. Frenzied trading in April contract calls is most notable in the first half of the session. Overall, investors are trading roughly 35 call options on HIG for each single put option in play today. More than 8,500 calls have changed hands at the April $28 strike on open interest of 3,327 contracts. The majority of these calls, or some 5,200 contracts, were purchased for an average premium of $0.43 each. Call buyers make money if HIG’s shares rally another 4.0% over today’s high of $27.33 to surpass the average breakeven price of $28.43 by expiration day next month. Two-way trading traffic is evident in the April $29 strike calls, but it looks like there are more buyers on the scene. Traders getting long the April $29 strike calls paid an average premium of $0.22 each to buy roughly 1,700 of the contracts this morning. Finally, bullish sentiment spread to the April $30 strike where more than 4,800 calls changed hands on open interest of 1,971 lots. Roughly 3,500 of the calls were bought at an average premium of $0.14 a-pop. Investors holding these contracts are poised to profit should shares in HIG jump 10.3% to exceed the average breakeven point to the upside at $30.14 ahead of April expiration. Options implied volatility on the stock is up 8.5% to stand at 35.28% as of 11:45am in New York.

LLNW - Limelight Networks, Inc. – Shares in the provider of content delivery network services jumped 7.3% today to touch an intraday high of $7.05 on speculation the company may be close to winning a content delivery network (CDN) deal with social networking giant, Facebook. Investors positioning for Limelight’s shares to extend gains in the near term picked up call options in the April and May contracts. More than 3,900 calls changed hands at the April $7.0 strike by 1:00pm in New York. Most of the now in-the-money call options were purchased for an average premium of $0.35 apiece. Call buyers at this strike profit in the event that shares in Limelight Networks increase another 4.3% over today’s high of $7.05 to trade above the average breakeven point on the upside at $7.35 by expiration day next month. The May $7.0 strike is popular with bullish speculators today, as well. Approximately 1,000 calls were scooped up at that strike for an average premium of $0.58 a-pop thus far in the trading session. Investors long the calls start making money if the price of the underlying stock rises another 7.5% to exceed the average breakeven price of $7.58 by expiration day in May. More than 9,250 option contracts traded on LLNW by 1:05pm, with traders exchanging upwards of 49 calls on the stock for each single put option in action today.

Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com

Caitlin Duffy
Equity Options Analyst


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