SHPGY - Shire PLC – The maker of Adderall XR and other pharmaceutical products attracted a diverse crowd of bullish options strategists during the session on speculation there are parties interested in acquiring the biopharmaceutical company. Shares in Shire are currently up 2.95% to arrive at an intraday- and new all-time high of $96.00. Plain-vanilla call buyers flocked to front month to position for continued new highs in Shire’s shares ahead of May expiration. Meanwhile, June contract put options provided the medium for a different type of bullish play today. Speculators engaging near-term call options picked up in- and out-of-the-money contracts, purchasing around 500 calls as high as the May $100 strike for an average premium of $0.23 each. Call buyers at the May $100 strike profit at expiration if shares in Shire are trading above $100.23. Investors may also choose to sell the calls ahead of expiration at an advantageous price should takeover chatter continue to bump up the price of the underlying, and perhaps more importantly, options implied volatility. Shire’s overall reading of implied volatility is up 24.5% to stand at 26.59% as of 2:15pm in New York. The options trader targeting put options is positioning to maximize profits on a credit spread should shares in Shire exceed $92.50 through June expiration. It looks like the investor sold approximately 2,400 puts at the June $92.5 strike for a premium of $1.63 each, and purchased roughly the same number of puts at the lower June $85 strike at a premium of $0.45 apiece. The investor pockets a net credit representing maximum potential profits on the spread of $1.18 per contract, and keeps all of it as long as the put options expire worthless at expiration. The risk involved in this type of strategy is not for the faint of heart. Shares in SHPGY could potentially reverse course ahead of expiration. In such a case, the trader starts losing money below a breakeven share price of $91.32. Maximum potential losses on the transaction, while limited to $6.32 per contract, far exceed the net credit received for bearing the risk. However, it seems the investor is willing to tolerate this risk-reward profile on the expectation that shares in Shire will be above $92.50 come expiration day next month. The put player realizes maximum losses on the position if shares in SHPGY drop 11.4% from the current price of $96.00 to trade below $85.00.
ODP - Office Depot, Inc. – A sizable short straddle on Office Depot this morning suggests one strategist is a seller of volatility at the prevailing level and sees the price of the underlying trading within a certain range through expiration in January 2013. Shares in the retailer of office supplies and services are up 3.75% this afternoon to arrive at $4.43 as of 1:55pm. It looks like the investor responsible for the transaction sold 10,000 in-the-money calls and 10,000 puts at the Jan. 2013 $4.00 strike to pocket combined premium of $2.10 per contract. A short straddle implies maximum potential profits in the amount of the premium received at the outset should shares in the underlying settle at the strike price at expiration. In this case the trader walks away with the $2.10 per contract if shares settle at $4.00 in January 2013. But, there are a few other factors in play that may work in the straddle-seller’s favor over the life of the position. First, options implied volatility. Subsiding levels of implied volatility benefit the investor by lowering premiums on both call and put options. The investor may, at any point ahead of expiration, decide to buy back the short straddle at an advantageous price – one that is certainly less than $2.10 per contract. Another factor to consider is that of time value. The long-dated option contracts have a great deal of time value. Selling the Jan. 2013 $4.0 straddle as opposed to the Jan. 2012 $4.0 strike straddle, for example, yields gross premium of $2.10 per contract instead of the $1.40 per contract available on the nearer-term options. The wasting nature of options is an asset to the short seller. Cheaper options in the future mean the trader may ditch the position with profits in hand by buying-to-close the straddle at some point ahead of expiration.
SKX - Skechers USA, Inc. – Call options on the footwear manufacturer are active this morning, with shares in Skechers USA rising as much as 6.5% at the start of the session to secure an intraday high of $19.16. The stock has largely surrendered earlier gains, and currently trades just 1.45% higher on the day at $18.25 as off 11:35am in New York. Options implied volatility remains elevated by 19.0% to stand at 43.32%, which is modestly lower than today’s highest level of 45.0%. Some investors bought into the rally straight away, picking up around 3,800 calls at the May $19 strike for an average premium of $0.36 each. Call buyers make money if shares in Skechers rally above the average breakeven price of $19.36 by expiration day. Other traders convinced the rally was likely to be short-lived sold some 1,100 call options up at the May $20 strike to pocket an average premium of $0.27 per contract. Call sellers keep the full amount of premium received today as long as the price of the underlying stock fails to exceed $20.00 at expiration. Investors selling the call options took advantage of inflated option premium spurred, in part, by the sharp increase in implied volatility. The stock’s volatility reading continues to cool along with Skechers’ share price, dragging premium on call options down, as well. Call sellers could now buy back their options for just $0.10 a-pop as of 11:55am. Meanwhile, traders who purchased the May $19 strike calls have been disadvantaged by those same factors of waning volatility and lower share price that worked in favor of call sellers today.
GNW - Genworth Financial, Inc. – Options traders dabbled in Genworth Financial call options today as shares in the insurance company increased as much as 4.1% to touch an intraday high of $11.71. Near-term bulls expecting the price of the underlying to extend gains through expiration later in the month picked up around 4,400 call options at the May $12 strike for an average premium of $0.09 apiece. More than 7,900 calls changed hands at that strike on previously existing open interest of 1,290 contracts. Two-way trading traffic in the June $12 strike call is notable, with volume at that strike climbing above 9,000 contracts by 12:30pm in New York. It looks like investors paid/received an average premium of $0.28 each by purchasing/selling roughly equal numbers of the calls. Investors populating Genworth options exchanged upwards of 18,050 contracts on the stock today, but largely ignored puts as evidenced by the call-to-put ratio of more than 16-to-1 this afternoon.
Andrew Wilkinson
Senior Market Analyst
[email protected]
Caitlin Duffy
Equity Options Analyst
