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Long-Dated Options Appear Rosy At JPM, Gloomy On MS

Posted on the 23 September 2011 by Phil's Stock World @philstockworld

Today’s tickers: JPM, MS & DF

JPM - JPMorgan Chase & Co. – A couple of options strategists appear to have exchanged sizeable blocks of long-dated calls and puts on JPMorgan this morning to position for shares in the name to rebound, or to at least hold, above recent multi-year lows. Shares in JPM came up for air today, rising 0.70% to $29.48 by 11:55 am in New York, following steep declines earlier in the week. The stock has tumbled nearly 40% since the first full week of April. One investor positioning for shares in JPM to at least hold above $29.00 come March 2012 expiration, sold some 7,000 puts at the Mar. 2012 $29 strike to pocket premium of $4.20 per contract. The investor may walk away with the hefty premium received on the sale of the time-rich, closest-to-the-money put options, as long as shares in JPM exceed $29.00 at expiration next year. The large short put position indicates the trader could wind up having 700,000 shares of the underlying stock put to him at an effective price of $24.80 each – after factoring in options premium – should the put contracts land in-the-money at expiration.

Meanwhile, a large stake in Mar. 2012 call options benefits the owner if JPM’s shares take off running to the upside within the next six months to expiration. It looks like one investor snapped up 5,000 calls at the Mar. 2012 $38 strike for a premium of $0.85 each within the first 15 minutes of the opening bell this morning. The call buyer profits at expiration if shares in JPMorgan Chase & Co. jump 31.8% over the current price of $29.48 to surpass the effective breakeven point at $38.85. But, the investor need not wait until expiration to potentially rake in profits on the bullish bet. If shares move in the right direction, the investor may be able to sell the position at an advantageous price ahead of expiration whether or not the options are in-the-money. Premium on the $38 strike call is the cheapest it has been, save for Thursday’s $0.79 premium per contract, in at least one month. The call options would have set you back $3.60 apiece, on average, back on September 1 when shares in JPM were trading around $37.00. Upside moves in JPMorgan’s shares could see premium on the calls rise above $0.85 each within the next six months. The call buyer could be looking to bank relatively modest gains given potential premium appreciation over time, rather than a 30%-plus move in the stock and a big payout at expiration. Options implied volatility on the stock fell7.1% to 58.8% in early-afternoon trade.

MS - Morgan Stanley – Buyers of deep out-of-the-money put options on Morgan Stanley this morning are armed and ready should a doomsday scenario knock the investment bank off its feet in the next year and a half. Shares in MS rallied 4.5% to $13.65 this afternoon on reports the firm’s estimated exposure to French losses is far lower than originally thought. The stock is up on the day, but still trades at a more than 55% discount off the 2011-high of $31.04.

More than 10,000 put options changed hands at the Jan. 2013 $5.0 strike this morning, against previously existing open interest of 706 contracts. The largest single block transacted at that strike, some 7,250 puts, were purchased for $0.66 apiece. One investor is likely responsible for most, if not all, of the volume generated in those contracts today. The trader may lose the premium paid for the puts if shares in Morgan Stanley fail to more than halve in value by expiration day. However, there are plenty of known and unknown factors that could send shares in MS and other banks lower by January 2013.

The European debt crisis, dysfunction in Washington, mounting signs global growth is slowing, and the ongoing mortgage mess, are a few of the known issues that have brought financial stocks to their knees. Shares in MS never fell as low as $5.00, even at their lowest point of the financial crisis in 2009, but the Jan. 2013 $5.0 strike put options may increase in value if the stock heads in that direction. A run-up in implied volatility could potentially bring the put options up to an attractive selling point for the trader ahead of expiration. The option contracts cost twice as much today as they did at the end of August; continued appreciation in the cost of protecting against catastrophic declines in the value of Morgan Stanley’s shares over the next 16 months may benefit the investor.

DF - Dean Foods Co. – Bullish options traders breakfasting on Dean Foods Company calls this morning appear to be gearing up for a substantial near-term rally in the price of the underlying stock. Shares in the distributor of milk and dairy products rose 2.8% in the first half of the session to $8.82. Investors exchanged more than 5,000 calls at the Oct. $10 strike against previously existing open interest of just 452 calls. It looks like nearly all of the contracts were purchased by one trader for an average premium of $0.15 apiece. The long options prepare the investor to profit should shares in Dean Foods Co. surge 15.1% to exceed the effective breakeven price of $10.15 at expiration next month. Continued gains in implied volatility on the stock, which currently stands 5.6% higher on the session at 49.33% as of 11:40 am ET, as well as share price appreciation in the weeks ahead, may allow the trader to sell the contracts ahead of expiration at an advantageous price. Premium paid for the bullish position represents maximum potential loss to the investor in the event that shares fail to exceed $10.00 at expiration day. Shares in Dean Foods last closed above $10.15 back on August 3.

Caitlin Duffy
Equity Options Analyst

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Long-Dated Options Appear Rosy At JPM, Gloomy On MS
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