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Massive Trade in American Eagle Calls Commands Attention

Posted on the 07 July 2011 by Phil's Stock World @philstockworld

Today’s tickers: AEO, AMKR, SWFT & ELX

AEO - American Eagle Outfitters, Inc. – Options on apparel retailer American Eagle are some of the most active today after one big player traded 65,000 February contract call options on the stock. Shares in the name surged 9.1% to an intraday high of $14.32 after June retail sales for apparel and teen stores came in far better than estimated. The run up in the price of the underlying today as well as the rise in implied volatility on the stock seem to have set the stage for the massive position initiated in AEO options. The trader sold some 65,000 calls at the February $15 strike, against nearly nonexistent open interest, to pocket premium of $1.10 per contract. Premium received on the trade amounts to $7.15 million, which the investor keeps as long as the calls expire worthless at expiration next year. The investor responsible for the transaction sees shares likely trading below $15.00 over the next eight months, but is on the hook to deliver a staggering 6.5 million shares of stock should the calls land in-the-money at expiration.

American Eagle’s shares spent the majority of their days trading above $15.00 from around February 10 through May 5. It seems reasonable to suspect the stock could once again rally above that level, particularly given the occasional bouts of takeover rumors that have pushed shares higher in the past. The enormity of the transaction and the risk of potentially needing to fulfill the contractual obligation to deliver stock at $15.00, regardless of how expensive shares could be in the open market at that time, may mean the investor responsible for the trade is long the stock and selling covered calls. In this scenario the trader is happy to pocket the rich premium available on the options given the length of time to expiration and increase in implied volatility on top of the sharp rise in the price of the underlying. The short stance in the calls caps the investor’s profits in the event that shares continue to soar through expiration. But, the investor could choose to buy back the calls at some point ahead of expiration thereby avoiding risks involved at exercise. Closing out the short calls gives him the opportunity to maintain long exposure and potentially keep some of the premium if he buys back the calls for less than $1.10 each. Alternatively, a naked short position in 65,000 calls leaves the party exposed to unlimited losses to the upside above a breakeven share price of $16.10.

AMKR - Amkor Technology, Inc. – The number of call options traded on Amkor Technology as of 1:00 pm on the East Coast is more than twice that of overall previously existing open interest on the stock. The burst of options activity on the provider of semiconductor packaging and test services shoved options implied volatility on the stock up 47.8% to 62.82%. Shares in the Chandler, AZ-based company are currently trading at their highest of the day, up 7.95% at $6.38 in early-afternoon trade. Investors dabbling in Amkor options focused their attention on the August $6.0 strike call, exchanging more than 20,000 in-the-money calls at that strike against paltry existing open interest of 114 contracts. Most of the call options appear to have been purchased for an average premium of $0.56 each. Plain-vanilla call buyers stand prepared to profit should shares in Amkor Technology rally another 2.8% to surpass the average breakeven price of $6.56 by August expiration day. Amkor reports second-quarter earnings after the final bell on August 4. Light, albeit bullish, trading in the August $7.0 strike call suggests other market participants were willing to shell out $0.20 in premium to secure the right to purchase shares in Amkor at $7.00 through expiration next month. Traders long the higher-strike calls profit if shares in AMKR surge 12.9% over the current price of $6.38 to exceed the effective breakeven price of $7.20 at expiration.

SWFT - Swift Transportation Co. – The agreement between the U.S. and Mexico that will allow Mexican trucks to operate in the U.S. is good news for North American truckload carrier Swift Transportation, which provides cross-border Mexico truckload service, among other things. News of the agreement between the neighboring nations helped Swift’s shares rally as much as 3.3% at the open to $14.36, and spurred demand for out-of-the-money calls on the stock this morning. Near-term bullish players looked to the July $15 strike, exchanging upwards of 2,200 calls against previously existing open interest of just 96 contracts. It looks like most of the calls were purchased for an average premium of $0.22 apiece. Investors long the calls profit if shares in the trucking company increase another 6.0% to surpass the average breakeven price of $15.22 by expiration next Friday. The rise in demand for calls on the stock bumped options implied volatility on SWFT up 9.4% to 43.59% this afternoon. Swift Transportation Co. is scheduled to report second-quarter earnings ahead of the opening bell on July 25, 10 days after the July contract options expire.

ELX - Emulex Corp. – Options traders populating Emulex Corp. today are positioning for shares in the Costa Mesa, CA-based company to continue to rebound, adding to the 1.0% rise in the price of the underlying stock to $8.87 this afternoon. Shares in ELX took a beating in the first half of 2011, falling roughly 38.0% from a 52-week high of $12.97 on January 13, down to a 52-week low of $8.02 on June 20. The stock has improved in the past two weeks, rising 10.6% off its lowest point of the year to the current price of $8.87. Investors expecting the recent trend to continue over the next six months appear to be engaging in plain-vanilla call buying, trading upwards of 7,000 call options at the January 2012 $9.0 strike this morning on open interest of just 587 contracts. It looks like the majority of the calls were purchased at that strike for an average premium of $0.75 a-pop. Call buyers profit at expiration next year if shares in Emulex surge 9.9% over the current price of $8.87 to surpass the average breakeven point to the upside at $9.75. The rise in demand for options on Emulex helped lift the stock’s overall reading of options implied volatility 6.1% to 29.05% by 12:35 pm in New York.

Andrew Wilkinson
Senior Market Analyst
[email protected]

Caitlin Duffy
Equity Options Analyst



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