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Earnings Beat Spurs Lively Trade In Schlumberger Options

Posted on the 22 July 2011 by Phil's Stock World @philstockworld

Today’s tickers: SLB, BSX, PSS & IFF

SLB - Schlumberger Ltd. – Shares in the world’s largest oilfield-services provider shot up 3.6% to $94.28 today after the company revealed better-than-expected earnings for the second quarter. Schlumberger said profits in the quarter increased 64% on rising crude prices, which spurred more onshore drilling on U.S. soil. Options traders appear to be employing numerous strategies on the stock, from profit-taking to fresh bullish positioning, across several expiries. Trading traffic is heaviest in the front month, where at least one investor likely raked in substantial profits post-earnings report. It looks like the trader originally purchased a 2,500-lot August $87.5/$92.5 call spread at a net cost of $2.30 per contract on Wednesday when SLB shares were trading around $88.48. The sharp rally in the price of the underlying in the past couple of days sent call premium skyward, and it looks like the investor sold the spread today at a net $3.63 per contract. Matching up net premium paid initially against that received today yields net profits of $1.33 per contract or around $332,500 in just a few days. Meanwhile, an investor betting on continued gains in shares of Schlumberger through September expiration appears to have enacted a three-legged ratio spread on the stock. The trader sold 1,000 puts at the September $85 strike for a premium of $1.32 each, purchased 1,000 in-the-money calls at the September $92.5 strike at a premium of $4.75 apiece, and sold 2,000 calls up at the September $100 strike for a premium of $1.56 a-pop. The transaction cost a net $0.31 per contract and makes the most money for the trader if shares in SLB jump more than 6.0% to settle at $100.00 at September expiration. Options implied volatility on SLB is down 13.9% to arrive at 25.88% in early-afternoon trade.

BSX - Boston Scientific Corp. – Bullish bets are building in Boston Scientific Corp. call options ahead of the company’s second-quarter earnings report ahead of the opening bell next Thursday. Trading traffic in longer-dated options may mean investors are looking to earnings and beyond for shares in the medical devices maker to hit new 52-week highs. Shares are currently up 0.85% to stand at $7.14 just after 11:00 am ET. Investors exchanged more than 3,000 calls at the November $9.0 strike against previously existing open interest of 913 contracts. It looks like nearly all of the calls were purchased for an average premium of $0.14 apiece. Buyers of the calls profit if shares in Boston Scientific jump 28.0% in the next four months to surpass the breakeven price of $9.14 by November expiration. Shares in BSX last exceeded $9.14 back in January 2010. Near-term bulls focused their attention on the August $7.0 strike where some 4,100 in-the-money calls changed hands this morning. It looks like much of the volume was initiated by buyers, but note that open interest at this strike is substantial at 23,439 contracts. Similarly, call buying of around 850 lots out at the Jan. 2012 $7.5 strike for an average premium of $0.63 each pales against open interest of more than 78,000 contracts. The demand for BSX calls helped lift options implied volatility on the stock 5.4% to 39.69% during the first half of the trading session.

PSS - Collective Brands, Inc. – Mixed trading in Collective Brands put options this morning suggests some investors expect shares in the operator of Payless ShoeSource to hold steady above $13.00, while others are prepared to profit should the price of the underlying head lower in the next five weeks to August expiration. Shares in PSS are currently down 1.65% to stand at $13.20 as of 12:10 pm ET. Optimists were the first to arrive on the scene. It looks like traders sold around 3,000 puts at the August $13 strike to pocket an average premium of $0.43 per contract. Put sellers keep the full amount of premium as long as shares in Collective Brands exceed $13.00 at expiration next month. The stock has fallen hard and fast over the past several months, dropping roughly 45.0% since the end of February, but has thus far managed to exceed $13.00 since September 2010. Traders short the put options could wind up having shares in PSS put to them at an effective average price of $12.57 each should the options land in-the-money at expiration. Meanwhile, bearish put buyers pumped up put volume at the August $13 strike by purchasing around 1,900 contracts at $0.43 a-pop. Investors long the puts profit if shares in Collective Brands slide 4.8% lower to breach the breakeven price of $12.57 by expiration day. In total, investors exchanged 5,740 puts at the August $13 strike against open interest of 1,902 contracts. The I-win you-lose nature of options come expiration day indicates only one of these strategies may prevail in the end. Options implied volatility on PSS dropped 10.8% to 36.66% in early-afternoon trade.

IFF - International Flavors & Fragrances, Inc. – The creator and manufacturer of flavor and fragrance products appears to be the target of one bearish strategist positioning for the price of the underlying to pullback ahead of August expiration. Shares in IFF are flat on the day at $63.28 as of 11:20 am in New York. The stock gained more than 52% in the past 12 months to secure a multi-year high of $66.29 on May 10. Shares are presently 4.5% off their high and recent options activity, including today’s transaction, indicates shares may slip a bit more in the near term. It looks like one trader this morning sold 1,500 calls at the August $65 strike for a premium of $0.50 each in order to purchase the same number of puts at the lower August $60 strike at a premium of $0.50 apiece. The sale of the calls exactly offsets premium required to get long the puts, thus establishing an effective breakeven price of $60.00. The investor profits if shares in IFF decline 5.2% from the current price of $63.28 to breach the $60.00-level by expiration day next month. Nearly all of IFF’s previously existing open interest resides in the August $65 strike call. Interestingly, it seems nearly all of the 14,278 calls in open interest at that strike were sold between June 20 and June 29 by traders pocketing an average premium of $0.76 per contract. Call selling suggests investors expect shares in IFF are unlikely to rally much above $65.00 through expiration in August. Both strategies, call selling and the spread, could be the work of investors holding IFF stock, or outright bearish players. International Flavors & Fragrances reports second-quarter earnings ahead of the open on August 9. An IFF earnings beat may mean investors absorb uncapped losses if it’s the case they are outright bearish holding naked short August $65 strike calls.

Andrew Wilkinson
Senior Market Analyst
[email protected]

Caitlin Duffy
Equity Options Analyst

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Earnings Beat Spurs Lively Trade In Schlumberger Options
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