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Far Out-Of-The-Money Calls In Play At Lululemon, Elan

Posted on the 16 March 2012 by Phil's Stock World @philstockworld

LULU - Lululemon Athletica, Inc. – Shares in the maker of high-end athletic apparel are taking a breather today, trading down 1.95% at $72.79 as of 12:30 p.m. in New York after closing at a record-high of $74.25 on Thursday. A large block of LULU call options purchased in the first 30 minutes of the session suggests at least one strategist may be positioning for the price of the underlying to stretch to new heights in the near term. The Company is scheduled to report fourth-quarter earnings ahead of the opening bell next Thursday. Options volume on Lululemon is heaviest at the April $80 strike, where more than 13,700 contracts changed hands against open interest of 1,291 positions. The single largest print, a block of 12,551 calls, appears to have been purchased for a premium of $1.60 per contract. The trader responsible for the transaction may be taking an outright bullish position on the high-flying apparel retailer, although, it’s possible the strategist is short the stock and buying the calls as a hedge. If the trader is making a purely bullish bet on LULU ahead of earnings, profits are available on the long calls in the event that the price of the underlying jumps 12.1% to top the effective breakeven price of $81.60 by expiration next month. Meanwhile, a put spread initiated in the weekly options indicates another trader is prepared for the shares to decline post earnings. It looks like a roughly 1,150-lot Mar. ’23 $65/$70 put spread was purchased at a net premium of $1.15 per contract, thus yielding profits or downside protection should shares dip down to the $70.00-level during the next five trading sessions.

ELN - Elan Corp. PLC – Shares in the Dublin, Ireland-based biotechnology Company are up big today, trading as much as 10.0% higher this morning to touch a new 52-week high of $15.04. The stock rallied sharply throughout the week, gaining more than 15.0% since Monday on the heels of the Company’s sale of 76.0% of its stake in Alkermes plc that raised $381 million in net proceeds. The stock has held onto much of today’s rally, trading 7.0% higher on Friday afternoon at $14.76. Elan popped up on our ‘hot by options volume’ market scanner this morning due to fresh positioning in far out-of-the-money call options. Volume continues to rise, with nearly 35,000 options in play on the stock as of 1:10 p.m. in New York. The day’s volume is roughly three times Elan’s 90-day average options volume read of 11,436 contracts. Early-birds flocked to the July $20 strike, where more than 12,300 calls changed hands against open interest of 928 positions. It looks like most of the call options were purchased for an average premium of $0.67 each, preparing buyers to make money should Elan’s shares jump more than 40.0% to exceed $20.67 at expiration in four months. The Company’s shares last traded north of $20.67 back in July of 2008.

POT - Potash Corp. of Saskatchewan, Inc. – The potash producer popped up on our market scanners this morning due to bullish activity in the weekly options that began trading yesterday. Shares in POT surged 5.8% to $45.34 today after a handful of analyst reports suggested shares in fertilizer producers may rally on impending inventory data. Traders positioning for the shares to extend gains next week snapped up in- and out-of-the-money calls on Potash Corp., purchasing more than 1,800 in-the-money contracts at the Mar. ’23 $45 strike for an average premium of $0.54 apiece. Call buyers may profit at expiration next week should shares in the Saskatoon, Saskatchewan-based Company settle above the average breakeven price of $45.54. Bullish action spread to the higher Mar. $47.5 strike where some 1,200 call options were picked up at an average premium of $0.15 each. Higher-strike looks may turn a profit for bullish players in the event that POT’s shares add another 5.1% to trade above $47.65 by expiration day.

Caitlin Duffy
Equity Options Analyst

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