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Options Strategist Harvests Gains on EQIX Call Butterfly Spread

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

Today’s tickers: EQIX, OMX, TER & JBLU

EQIX - Equinix, Inc. – In the final trading week of 2010 we reported seeing one options strategist purchase a sizable bullish call butterfly spread on Equinix. It has been nearly four months to the day since the investor paid a net premium of $3.10 per contract for the June $85/$100/$115 call ‘fly, and it looks like the trader is reeling in substantial profits today by unraveling the position. Shares in the provider of global data center services are currently up 3.8% to stand at $100.30 as of 11:20am in New York. The company reported first-quarter earnings of $0.53 a share on Wednesday, which beat average analyst expectations of $0.30 a share in net income for the quarter. The trader responsible for the bullish spread nearly hit the nail on the head. On December 29, 2010, shares in Equinox closed the session at $81.20. Since then, the stock has climbed roughly 23.5% to today’s price. While the upward move in the price of the underlying happened a bit more quickly than estimated, the trader’s predictions for the magnitude of the move were pretty much spot on. It appears the investor closed out the spread this morning, selling 15,000 calls at the now deep in-the-money June $85 strike for a hefty premium of $16.20 each, bought back the 30,000 short calls at the June $100 strike for a premium of $4.70 each, and sold 15,000 of the June $115 strike call options at a premium of $0.30 a-pop. The trader takes in net premium of $7.10 per contract by closing out the spread, and therefore realizes net profits of $4.00 per contract, or around $6 million in total, after accounting for the initial cost of buying the spread at $3.10 apiece. Had Equinix’s shares risen more slowly, hitting $100.00 at expiration in June, the investor could have realized maximum potential profits of $11.90 per contract. But, in the end the investor’s predictions for EQIX’s performance and the options strategy used to exploit those predictions paid off. Options implied volatility on Equinix is down 19.6% post-earnings to stand at 25.68% as of 11:40am in New York.

OMX - Office Max, Inc. – Disappointing first-quarter earnings from the third-largest U.S. office supplies retailer sent shares in Office Max sharply lower today. The stock fell nearly 19.0% at the start of the session to touch an intraday low of $10.12 after the company posted a 54% decline in quarterly profit, and a 2.8% drop in sales. Contrarian options players preparing for a near-term rebound in the price of the underlying appear to be taking advantage of depressed premiums on out-of-the-money calls in the front month. Roughly 3,280 calls changed hands at the May $11 strike on open interest of just 14 contracts. It looks like most of these calls were purchased for an average premium of $0.51 apiece. Investors long the calls make money if shares in OMX bounce-back in the next several weeks to trade above the average breakeven price of $11.51 by May expiration. Another 3,000 calls traded at the May $12 strike on 708 open contracts. Trading in the higher-strike calls was mixed, with roughly equal numbers of call buyers and sellers taking positions. Meanwhile, bears expecting further bearish movement in OMX’s shares purchased roughly 1,000 puts at the May $11 strike for an average premium of $1.03 each. Put volume is heaviest out at the August $9.0 strike where some 7,300 puts traded during the first half of the session. Investors appear to have purchased around 5,600 of the puts for an average premium of $0.39 a-pop. The value of these put options may appreciate substantially if shares in the office supplies retailer continue to pull back in the next four months to August expiration.

TER - Teradyne, Inc. – Investors populating options on the provider of automatic test equipment appear to be initiating or adjusting bullish positions on the stock despite the 15.2% drop in the price of the underlying this morning to a low of $15.51. Teradyne’s shares plunged following the company’s first-quarter earnings report on weaker-than-expected earnings and revenue projections for the second quarter. But, in the near-term at least, it looks like some options players are hoping to see Teradyne’s shares recover. Investors purchased around 1,850 calls at the May $18 strike for an average premium of $0.20 each. Meanwhile, nearly 4,000 puts sold at the May $16 strike for an average premium of $0.59 each. Put sellers keep the full amount of premium received as long as shares in TER rally above $16.00 by expiration day next month. June contract call activity appears to be the work of one investor either buying a call spread on the stock, or adjusting a previously established bullish stance on Teradyne. Some 3,000 calls were picked up at the June $16 strike for an average premium of $1.10 each, while the same number of calls likely sold for a premium of $0.25 each up at the June $18 strike. Non-existent open interest at the closer-to-the-money strike indicate the calls were purchased-to-open, but open interest at the June $18 strike is sufficient to cover the 3,000 lots traded there today. Furthermore, open interest patterns at the higher-strike price suggest 3,000 calls were purchased back on April 21, 2011, for a premium of $1.05 each. If the trade today represents a closing-sale to roll the position to a closer-to-the-money strike, the investor faces unlimited gains in step with any potential rally in the price of the underlying through June expiration. In the event that both legs of the transaction are opening positions, the investor stands prepared to accrue maximum potential profits of $1.15 per contract should Teradyne’s shares surge 16.05% over today’s low of $15.51 to trade above $18.00 by expiration day in June. Options implied volatility on the stock is lower by 15.2% as of 12:25pm to arrive at 36.39%.

JBLU - JetBlue Airways Corp. – Shares in the passenger airline operator slipped 1.1% to $5.51 today, but it looks like at least one options player is positioning for the price of the underlying stock to lift-off ahead of December expiration. It looks like more than 6,800 call options changed hands at the December $7.0 strike on paltry previously existing open interest of just 10 contracts. Investors purchased upwards of 5,500 of those call options for an average premium of $0.30 per contract. Call buyers make money in the event that JetBlue’s shares surge 32.4% over the current price of $5.51 to surpass the average breakeven point at $7.30 by December expiration. JBLU’s shares last traded above $7.30 back in November 2010.

Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com

Caitlin Duffy
Equity Options Analyst

 


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