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Options Strategists Rig Up Bearish Plays On Transocean

Posted on the 25 March 2011 by Phil's Stock World @philstockworld

Today’s tickers: RIG, S, EK & TDC

RIG - Transocean Ltd. – Activity in near-term put options on the provider of offshore drilling services suggests some investors expect shares in Transocean to head further South in the next few weeks. RIG’s shares are currently down 2.00% to stand at $78.67 in early-afternoon trade. The stock is down 8.5% off its 11-month high of $85.98 set on March 3, 2011. Investors piled into put options in the front month, scooping up the contracts at deep out-of-the-money strike prices as low as the April $65 strike. Bearish players purchased around 1,400 of the April $80 strike put options at an average premium of $3.11 each. Put buying spread to the lower April $75 strike, the most heavily trafficked strike thus far in the session, to secure 2,800 puts for an average premium of $1.26 a-pop. More than 4,000 puts changed hands at the April $70 strike on paltry previously existing open interest of just 162 contracts. It looks like the majority of the contracts were purchased at an average premium of $0.41 each. Finally, two-way traffic drove volume at the April $65 strike price up to 2,860 contracts this afternoon. Overall options volume on RIG has topped 33,000 contracts as of 1:35pm on the final trading day of the week.

S - Sprint Nextel Corp. – A massive stock and options combination play on Sprint Nextel Corp. today appears to be the work of an investor looking for shares in the communications company to shift higher ahead of May expiration. Shares in Sprint are continuing to improve today, up 2.2% at $4.66 as of 12:35pm in New York. The stock took a beating earlier this week after AT&T announced plans to merge with T-Mobile, but has since been on the mend. We observed a number of bullish options plays on Sprint this week, and today seems to be no exception. It looks like one strategist purchased 50,000 in-the-money calls at the May $4.5 strike for a premium of $0.37 apiece, and sold 2,850,000 shares of the underlying at $4.56 each, on a 0.57 delta. The delta-neutral transaction bolsters what is likely this trader’s bet on continued bullish movement in the price of Sprint’s shares ahead of May expiration. The sale of the stock protects him to the downside in the event of any unforeseen exogenous shock to the market that sends shares in the name sharply lower, while the massive long call position is beneficial in the event that shares rally higher. Sprint’s shares were trading as high as $5.26 on March 18, 2011.

EK - Eastman Kodak Co. – Call options are flying off the shelves at Eastman Kodak today in advance of a decision, which could come as early as this evening, as to whether the U.S. International Trade Commission (ITC) will review a finding of no infringement that resulted from a patent suit against Apple and Research in Motion in January. The ITC ruled in favor of 131-year old Kodak in a similar case against Samsung and LG Electronics, which fetched substantial royalties of around $964 million for EK. The potential for Kodak to rake in similar royalties in the event that the ITC reviews the earlier finding, and rules patent infringement occurred in this case, sent shares in Eastman Kodak Co. flying this morning and spurred a stampede of bullish speculators to options land. Shares in the digital camera maker increased as much as 13.1% at the start of the session to hit an intraday high of $3.54. Nearly 45,000 option contracts have changed hands on the stock as of 11:45am, with traders heavily favoring calls over puts. Call volume is greatest at the April $4.0 strike where more than 24,500 contracts traded on open interest of 9,338 lots. Around 18,850 of the April $4.0 strike call options were purchased for an average premium of $0.15 each in the first half of the trading day. Call buyers at this strike make money if shares in EK jump 17.2% over today’s high of $3.54 to exceed the average breakeven price of $4.15 by April expiration day. Fresh call buying activity spread to the May $4.0 strike where some 1,500 calls were purchased for an average premium of $0.21 apiece. Also popular are the May $5.0 strike call options. Traders picked up more than 1,400 of the higher-strike contracts for around $0.10 a-pop. Heavy volume is building in July contract calls, as well. The more than 10,000 lots traded at the July $4.0 strike, and the 8,100 calls at the July $5.0 strike, were purchased for the most part although open interest is substantial at both strikes. Options implied volatility spiked during the session, but has come off somewhat to stand 59.5% higher on the day at 99.81% as of 11:50am in New York.

TDC - Teradata Corp. – Options activity on Teradata Corp. is booming this afternoon, with current volume at 33,331 option contracts exceeding overall open interest on the stock at a lesser 27,062 contracts. Nearly all of the trading involved call options. Shares in the provider of enterprise data warehousing shot up around 2.0% during the session to secure an intraday- and new all-time high of $51.40. It looks like one options strategist placed a bullish bet on the TDC back on January 31, 2011, buying 10,000 calls for a premium of $0.50 each when the price of the underlying was hovering around $42.95. The substantial move higher in the price of the underlying since that point has significantly boosted the value of the calls. The trader appears to have sold the now in-the-money call options at a far richer premium of $1.95 each today. Next, the investor extended bullish sentiment on the stock by picking up another batch of 10,000 calls up at the May $60 strike for an average premium of $0.65 apiece. Shares in Teradata Corp. would need to soar 18.0% over today’s new high of $51.40 in order to rise above the average breakeven price of $60.65 on the fresh call stance by May expiration. TDC is scheduled to report first-quarter earnings ahead of the opening bell on May 5, 2011.

Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com

Caitlin Duffy
Equity Options Analyst

 


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