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Bank of America Bull Sets Up Shop in August Contract Calls and Puts

Posted on the 09 June 2011 by Phil's Stock World @philstockworld

Today’s tickers: BAC, VRTX, SKX & GT

BAC - Bank of America Corp. – Pessimism on the financial sector overflow-eth as of late and shares in Bank of America currently hover just above fresh 2-year lows, but for one contrarian strategist it looks like now is the perfect time to bet big on a BAC-rebound. Shares in Bank of America lost 31.4% of their value since mid-January, sliding to as low as $10.50 before rising 1.50% this afternoon to $10.70. Hoping to see shares in the financial services company recover by the dog days of summer, it appears one big player employed a three-legged bullish spread using August contract call and put options. The investor picked up 25,000 calls at the August $11 strike for a premium of $0.46 each, sold the same number of calls up at the August $14 strike at a premium of $0.02 per contract, and sold 25,000 puts at the August $9.0 strike for a premium of $0.14 a-pop. The net cost of the transaction reduces to $0.30 per contract and prepares the trader to profit should BAC’s shares rally 5.6% over the current price of $10.70 to breach the effective breakeven point at $11.30 by August expiration day. The trader paid $0.30 per contract – or a total of $750,000 – for the spread, but stands ready to make as much as $2.70 per contract or $6.75 million if the price of the underlying soars 30.8% in the next couple of months to exceed $14.00 at expiration. The parameters of the transaction are such that the investor could lose more than just the three-quarters of a million dollars paid for the transaction. Short puts at the August $9.0 strike indicate the trader could have 2.5 million shares of the underlying put to him at $9.00 at expiration should the stock continue to deteriorate. But, the investor seems more than happy to bear such risk in exchange for the added financing provided by the third-leg of the spread. Shares in BAC have traded above $9.00 since May 2009.

VRTX - Vertex Pharmaceuticals, Inc. – Shares in Vertex Pharmaceuticals dropped 13.2% to an intraday low of $46.15 this morning after results from a clinical trial for cystic fibrosis failed to meet analysts’ expectations. The stock is off its lows of the session, but still stands 9.45% lower on the day at $48.13 as of 12:15pm in New York. Trading patterns in the drug maker’s options suggest mixed investor sentiment regarding the future performance of the stock. Some traders appear to be positioning for a rebound in the price of the underlying, while others are bracing for further declines. It looks like at least one strategist was prepared to benefit from a sharp pullback in VRTX shares. The owner of a three-legged bearish spread initiated back on May 24 – when shares in Vertex were trading around $56.09 – is now holding a far more valuable position. Open interest patterns suggest the three-way spread involved the sale of 2,000 calls at the July $65 strike, the purchase of 2,000 puts at the July $55 strike, and the sale of 2,000 puts at the July $48 strike, all at a net cost of $1.40 per contract. Today, with the value of the calls crumbling and the price for bearish put options soaring, buying the same three-legged position requires $5.15 in premium per contract. In other words the same spread is today more than 3.5 times as expensive as it was two weeks ago. It is unclear whether the trader responsible for the original position was placing an outright bearish bet on the drug maker or hedging a long position in the underlying stock. Either way it seems a prudent move given the dip in shares today.

Fresh options trades on the stock today are worth noting, as well. A bearish 1,000-lot October $41/$49 put spread purchased at a net premium of $4.25 per contract indicates one trader is prepared to see the stock decline further. The investor profits if shares plunge 7.0% from the current price of $48.13 to breach the effective breakeven point on the spread at $44.75 by expiration in October. Maximum potential profits of $3.75 per contract pad the investor’s wallet should shares trade below $41.00 at expiration. Finally, a touch of near-term optimism appeared in the June $50 strike puts where some 800 calls were picked up for an average premium of $0.67 apiece. Contrarians positioning for a bounce make money in the event that VRTX shares rebound to exceed the average breakeven point at $50.67 by expiration next week.

SKX - Skechers USA, Inc. – Bearish investors are bulking up on Skechers put options this morning with shares in the footwear maker declining as much as 4.5% at the start of the session to touch an intraday- and new 52-week low of $13.29. Analysts at Susquehanna lowered their share price target on SKX to $14.00 from $17.00 this week. Skechers shares plunged 70.4% since June 2010 and it looks like some options strategists are positioning for the stock to extend losses through October expiration. Investors picked up more than 2,250 in-the-money puts at the October $14 strike for an average premium of $1.79 each today. Put buyers profit if shares in the shoe maker drop another 8.1% to breach the average breakeven price of $12.21 by expiration day in October. Similar bearish behavior was observed at the October $14 strike on Wednesday as traders purchased around 2,000 of the puts for an average premium of $1.59 apiece. Meanwhile, patches of put selling at the October $11 and $12 strikes suggests some players are placing a floor on just how low SKX shares can go. Traders sold around 220 puts at the October $11 strike for a premium of $0.55 per contract, and shed some 420 puts at the October $12 strike to pocket an average premium of $0.95 a-pop. Put sellers keep the full amount of premium as long as the put options expire worthless at expiration. The rise in demand for put options on the stock helped lift the overall reading of options implied volatility on Skechers USA 11.9% to 46.92% by noon on the East Coast.

GT - Goodyear Tire & Rubber Co. – Near-term bullish players are picking up Goodyear Tire & Rubber Co. call options this afternoon to position for a rally in the price of the underlying. Shares are currently up 0.90% to arrive at $15.13 just before 2:00pm in New York. Most of the call options in play today expire ahead of the company’s second-quarter earnings report on July 28. Investors exchanged more than 1,400 in-the-money calls at the June $16 strike on open interest of 730 contracts. It looks like the majority of the calls were likely purchased for an average premium of $0.45 each. Call buyers scooped up some 1,700 contracts up at the June $17 strike at an average premium of $0.19 a-pop. Traders long the calls profit if shares in Goodyear surpass the average breakeven prices of $16.45 and $17.19 by expiration, respectively. A chunk of 4,000 calls traded on the offer at the June $18 strike for a premium of $0.05 per contract. The block of calls may have been tied to stock. In-the-money call action was observed out at the July $15 strike where some 2,800 contracts appear to have been purchased at a premium of $1.50 apiece. Open interest of 7,349 contracts at this strike is sufficient to cover the day’s volume, and call buying at this strike may or may not represent opening positions. Finally, some 10,000 put options changed hands at the January 2012 $15 strike against previously existing open interest of just 911 contracts. Nearly all of the puts traded on the bid, suggesting the puts were sold. Put sellers walk away with the full amount of premium, an average of $1.65 per contract, if shares in Goodyear exceed $15.00 at expiration in January.

Andrew Wilkinson
Senior Market Analyst
[email protected]

Caitlin Duffy
Equity Options Analyst


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