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Call Buyers Shrug Off $2 Billion Disaster, Position For UBS Recovery Story

Posted on the 15 September 2011 by Phil's Stock World @philstockworld

Today’s tickers: UBS, MHP, ESRX & DGX

UBS - UBS AG – Switzerland’s largest bank said it may be unprofitable in the third quarter due to the staggering $2 billion in trading losses one of its employees racked up in unauthorized dealing. The news sent shares in UBS down as much as 11.6% to a two-year low of $11.21, but options traders appear to have largely shrugged off concerns and are betting on a rebound in the price of the underlying. Call buying and put selling on the stock appear to be the most oft-employed strategies of the day. Investors expecting shares to recover in the next five weeks picked up roughly 3,100 calls at the October $12 strike for an average premium of $0.73 each. Call buyers profit if shares in UBS rally 12.5% over the stock’s current price of $11.32 to exceed the average breakeven point at $12.73 by expiration day next month. Meanwhile, put sellers targeted the October $10, $11 and $12 strikes, suggesting some investors expect shares to exceed those levels through October expiration. Traders pocketed an average premium of $1.27 per contract on the sale of roughly 615 puts at the October $12 strike. Premium received is money in the bank for sellers of the options as long as the contracts expire worthless next month. Longer-dated calls drew some attention, as well. Investors snapped up around 2,000 calls at the December $12 strike for an average premium of $1.10 each. Traders may see the value of these calls appreciate if shares in UBS reverse course over the next few months to December expiration. The positions are profitable at expiration if shares exceed the effective breakeven price of $13.10.

MHP - McGraw-Hill Companies, Inc. – A burst of activity in McGraw-Hill call options minutes before 12:00 pm ET in New York caught our eye today. Trading patterns in September and October contract calls suggest one or more strategists positioned for the price of the underlying to extend gains enjoyed on the heels of the text book publisher and Standard & Poor’s owner’s decision earlier in the week to split up the business in two. Shares in McGraw-Hill are up 1.6% this afternoon to stand at $44.15 as of 1:50 pm ET. Roughly 1,000 in-the-money calls changed hands at each of the September $42 and $43 strikes today. It looks like buyers outnumber sellers of these contracts, although open interest is sufficient to cover volume in both cases. Fresh interest in calls is evident out at the October $45 strike where more than 1,700 contracts traded against open interest of just 283 positions. Nearly all of the Oct. $45 strike calls appear to have been purchased at a premium of $1.90 a-pop. Investors long the calls profit if shares in MHP surge 6.2% to exceed the effective breakeven price at $46.90 by October expiration. Trading in McGraw-Hill Companies call options outpaced that of puts covering the stock by more than 14-to-1 in afternoon trade.

ESRX - Express Scripts, Inc. – Shares in the Saint Louis, Missouri-based pharmacy benefits manager shed 3.0% in early-afternoon trade to stand at $41.48 after a number of analysts lowered share price estimates and third-quarter earnings guidance for Express Scripts. Comments from the company’s CFO at a conference on Wednesday preceded a more than 6.7% drop in the price of the underlying to the lowest since the flash crash on Thursday. The stock is well of its lowest point of the day, and options trading patterns on the stock suggest some strategists are positioning for the recovery to continue in the near term. Traders itching for an immediate bounce this week picked up roughly 1,350 calls at the September $40 strike for an average premium of $0.92 this morning. The intraday rebound in ESRX shares now sees these options trading comfortably in-the-money at a far richer premium of $1.60 each. These calls expire at the end of this week. Like-minded optimists snapped up in- and out-of-the-money call options in the October contract, as well. Trading traffic is heaviest out at the October $45 strike, where more than 5,000 contracts changed hands by 12:30 pm ET. Early movers were buying more of the $45 strike call than selling, and paid an average premium of $0.85 apiece. Investors long the calls at $0.85, on average, stand prepared to profit should Express Scripts shares surge 10.5% in the next five weeks to October expiration. Meanwhile, traders seeking immediate-term downside protection paid an average premium of $0.36 for some 2,000 puts at the Sept. $40 strike this morning, but the rebound in ESRX shares in the hours since saw put premium more than halve to $0.15 per contract this afternoon. Options implied volatility on the stock is off its highest points of the session, but remains elevated, up 9.9% at 40.97% as of 12:35 pm in New York.

DGX - Quest Diagnostics, Inc. – The provider of diagnostic testing, information and services popped up on our ‘hot by options volume’ market scanner after a sizable bear put spread was initiated in the Jan. 2012 contract. Shares in DGX slipped 3.3% to $47.70 this afternoon. The company presented at the Morgan Stanley Global Healthcare Conference in New York City on Tuesday. It looks like one trader purchased the 2,500-lot Jan. 2012 $30/$40 put spread at a net premium of $2.10 per contract to position for additional downside moves in the months ahead. The investor responsible for the spread profits if shares in Quest Diagnostics plunge 20.5% to breach the effective breakeven price of $37.90 by expiration next year. Maximum potential profits of $7.90 per contract are available to the trader should shares in DGX tumble 37.1% from the current price of $47.70 to trade below $30.00 by expiration day. DGX shares came within $0.80 of $40.00 on the May 6 flash crash, but haven’t been anywhere near $30.00 since 2003.

Andrew Wilkinson
Senior Market Analyst
[email protected]

Caitlin Duffy
Equity Options Analyst

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Call Buyers Shrug Off $2 Billion Disaster, Position For UBS Recovery Story
Call Buyers Shrug Off $2 Billion Disaster, Position For UBS Recovery Story
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