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Call Buying On Sprint Amid Session Lows Well-Played As Shares Rebound

Posted on the 04 October 2011 by Phil's Stock World @philstockworld

S - Sprint Nextel Corp. – Seemingly well-timed call buying on Sprint in the first hour of the trading session has seen the value of options held by one or more bullish investors appreciate intraday. Shares in Sprint Nextel Corp. fell as much as 17.6% this morning to touch down at a new 52-week low of $2.25, but have since fought their way back to rally 2.2% to $2.79 just after 12:35 pm EDT. The stock tumbled this week on news the third-largest U.S. wireless carrier is committed to buying at least 30.5 million iPhones over the next four years, a deal estimated to cost around $20 billion, as reported in today’s Wall Street Journal. Concerns regarding the terms of the deal were reflected in the steep selloff that ensued in Sprint shares. But, activity in Jan. 2012 contract call options this morning suggests some traders were ready to position for a rebound in the battered stock. It looks like investors purchased around 18,400 calls at the Jan. 2012 $2.5 strike for an average premium of $0.57 apiece, against previously existing open interest of 9,650 contracts. The calls that had earlier cost an average of $0.57 to purchase now require $0.76 per contract roughly two hours later. Premium on the calls should continue to rise should Sprint’s shares extend their recovery in the months remaining to January 2012 expiration. Options traders populating Sprint Nextel Corp. are trading roughly three calls on the wireless provider to each single put in action. Options implied volatility is up 30.3% to arrive at 119.8% this afternoon.

GS - The Goldman Sachs Group, Inc. – Shares in Goldman Sachs are well off their lows of the session, having earlier dropped as much as 6.45% to a 31-month low of $84.27. The stock remains firmly in the red, however, down 2.1% at $88.18 as of 11:30 am in New York. Not surprisingly, options on financial stocks and the XLF are some of the most active today on fears that Europe, and potentially the U.S., may see a double-dip recession. Shares in Goldman Sachs Group have been hammered lower in the past few months, but put activity in the November contract suggests the worst is yet to come for shareholders. It looks like one investor initiated a bearish put spread, buying roughly 2,700 puts at the Nov. $80 strike for an average premium of $7.08 each, and selling around the same number of puts at the lower Nov. $60 strike at an average premium of $2.67 apiece. Net premium paid to initiate the spread amounts to $4.41 per contract, thus positioning the investor to profit should Goldman’s shares drop 14.3% from the current price of $88.18 to breach the effective breakeven point on the downside at $75.59 at expiration. Maximum potential profits of $15.59 per contract are available on the bearish position in the event that GS shares plummet 32.0% to trade below $60.00 come expiration in November. Continued turmoil overseas could see the selloff in Goldman’s shares worsen in months ahead, which may work to the put-spreader’s advantage. Meanwhile, the company is scheduled to report third-quarter earnings ahead of the opening bell on October 18.

RIMM - Research In Motion Ltd. – Rumors that the BlackBerry maker hired an investment banker to assist in weighing strategic options spurred heavy trading traffic in the weeklies this morning. Shares in RIMM are up 4.15% at $21.35 as of 12:05 pm on the East Coast, after earlier rallying as much as 9.7% to $22.49. Options on Research In Motion are some of the most active today, with volume on the stock approaching 110,000 contracts in early-afternoon trade. Investors are favoring calls, exchanging nearly 2 call options for each single put in play thus far in the session. Fresh prints in weekly calls suggest some strategists are positioning for shares in RIMM to extend gains through the end of this week. Volume in the weeklies is heaviest at the Oct. ’07 $22 strike, where more than 8,600 contracts changed hands against previously existing open interest of 2,399 positions. Traders appear to have purchased the majority of the contracts for an average premium of $0.59 each. Call buyers profit if RIMM’s shares rally another 5.8% to exceed the average breakeven price of $22.59 at expiration. Buyers outnumbered sellers driving substantial volume in calls at the Oct ’07 $24 and $25 strikes, as well. Continued speculation surrounding the beleaguered BlackBerry maker could be just what call buyers need to see the value of their call options appreciate in the next few days. Increases in options implied volatility on the stock, which currently trades 2.38% higher on the day at 81.0%, may also benefit long option holders.

CCL - Carnival Corp. – A sizable debit put spread on the operator of cruise lines may be one investor’s way of prepping for shares in Carnival Corp. to pullback should the global economy continue to slow and the likelihood of a possible double-dip recession in Europe and the United States increase. Consumers who might have otherwise splurged on a cruise vacation this winter, may choose instead to hoard their discretionary dollars given heightened uncertainty in the air. Fewer cruise-goers could hurt Carnival’s chances of pleasing analysts and investors when the company releases its fourth-quarter earnings report on December 21. Shares in Carnival Corp. today fell as much as 3.65% to $28.52, before turning positive this afternoon, gaining 0.75% to trade at $29.81 by 1:10 pm in New York. It looks like the options trader purchased the roughly 7,000-lot Jan. 2012 $20/$25 put spread this morning for an average net premium of $1.20 per contract. The spread positions the trader to profit should CCL’s shares drop 20.2% to breach the average breakeven price of $23.80 at expiration next year. Maximum potential profits of $3.80 per contract are available to the investor in the event that Carnival Corp.’s shares plunge 32.9% to trade below $20.00 at January expiration day. Shares in CCL last traded below $20.00 back in March 2009.

Caitlin Duffy
Equity Options Analyst

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