Business Magazine

Options Player Plants Short Straddle on Health Management Associates

Posted on the 06 June 2011 by Phil's Stock World @philstockworld

Today’s tickers: HMA, DELL, AWI & DISCA

HMA - Health Management Associates, Inc. – A sizable short straddle on the provider of health care services yields maximum benefits to the seller at expiration if the price of the underlying stock remains fairly stagnant in the next couple of months. Shares in Health Management Associates fell 1.75% this afternoon to $10.69 just before 12:30pm in New York. Options volume in the amount of 10,000 calls and 10,000 puts employed by the straddle-strategist is huge compared to overall previously existing open interest on HMA of 12,857 contracts. It looks like the trader sold the straddle outright, receiving $0.45 per contract on the sale of 10,000 calls at the August $11 strike, and taking in $0.90 per contract on the sale of 10,000 puts at the same strike. Gross premium pocketed on the trade amounts to $1.35 per contract, which the trader keeps in full if shares in HMA settle at $11.00 at expiration day in August. The investor may retain some portion of the $1.35 per contract as long as shares remain range-bound within the upper breakeven price of $12.35, and the lower breakeven point at $9.65, through expiration. Shares in the health care provider have traded above $9.65 since the end of February, and have not topped $12.35 since 2007. Of course, the options player need not hold the position through expiration to make the transaction worth his while. The effects of time erosion on options premium as well as lower volatility could be beneficial for the investor, and may allow him to buy back the straddle at an advantageous price at some point ahead of August expiration. Health Management Associates is scheduled to report second-quarter earnings after the closing bell on July 26, 2011.

DELL - Dell, Inc. – Shares in the PC maker are up 3.00% to arrive at $16.06 as of noon on the East Coast, but it looks like one options trader is prepared for the price of the underlying to pull back ahead of July expiration. The investor appears to have sold around 2,500 July $17 strike call options in order to offset the cost of buying the July $14/$15 put spread, 2,500 times. The trader pockets a net credit of $0.02 per contract on the three-legged spread, and keeps the full amount as long as shares trade below $17.00 through expiration day. Additional profits are available should shares in Dell decline 6.6% from the current price of $16.06 to breach $15.00 at expiration. The trader could walk away with maximum potential profits of $1.02 per contract, including the 2-cents per contract credit, if Dell’s shares fall 12.8% to trade below $14.00 by expiration next month.

AWI - Armstrong World Industries, Inc. – Put activity on the producer of flooring products and ceiling systems this morning suggests one strategist is positioned for the price of AWI’s shares to decline significantly by September expiration. Shares in Armstrong World Industries fell 2.05% to $45.11 by 11:15am in New York. The investor responsible for the debit spread picked up 2,500 puts at the September $40 strike for a premium of $1.50 each, and sold the same number of puts at the lower September $35 strike at a premium of $0.50 apiece. Net premium paid to initiate the bearish play amounts to $1.00 per contract. Profits are available on the spread in the event that Armstrong’s shares plunge 13.5% in the next few months to breach the effective breakeven price of $39.00 at expiration in September. Maximum potential profits of $4.00 per contract pad the investor’s wallet should shares drop 22.4% off the current price of $45.11 to trade below $35.00 by expiration day. AWI’s shares last traded below $39.00 back in September 2010. The relatively large size of the put spread, 5,000 contracts against previously existing open interest of 9,310 contracts on the stock, helped lift AWI’s overall reading of options implied volatility 7.4% to 34.25% this morning.

DISCA - Discovery Communications, Inc. – The global media and entertainment company’s shares are up off their lowest point of this morning, but put activity in the July contract suggests the price of the underlying may descend further ahead of expiration next month. Shares in the provider of television brands such as TLC and Animal Planet fell as much as 1.2% earlier in the session to touch an intraday low of $41.44, and currently trade 0.75% lower on the day at $41.65 as of 12:20pm. Pessimism on Discovery appeared at the July $40 strike where some 1,800 puts were purchased for an average premium of $0.50 per contract. Put buyers make money if shares in DISCA drop 5.2% off the current price of $41.65 to trade beneath the effective breakeven point on the downside at $39.50 by expiration. The rise in demand for bearish put options on Discovery helped raise the stock’s overall reading of options implied volatility 8.0% to 20.69% in early-afternoon trade.

Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com

Caitlin Duffy
Equity Options Analyst

 


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