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North American Palladium Draws Bullish Bets

Posted on the 14 July 2011 by Phil's Stock World @philstockworld

Today’s tickers: PAL, VMED, ADLR & VIP

PAL - North American Palladium, Ltd. – Shares in the platinum and precious metals mining company rose as much as 6.4% at the start of the session to an intraday high of $4.98 before the broad market soured during Fed Chairman Bernanke’s second day of testimony on Capitol Hill. North American Palladium’s shares currently stand 3.85% lower on the day at $4.50 as of 12:30 pm ET. The rally in the price of the underlying this morning spurred bullish options activity on PAL. Investors positioning for shares in the Toronto, ON-based company to extend gains scooped up more than 2,000 calls at the August $5.0 strike for an average premium of $0.38 each. Call buyers at this strike profit in the event that shares surge 19.6% over the current price of $4.50 to surpass the average breakeven point on the upside at $5.38 at expiration next month. Similar, albeit lighter, bullish interest cropped up at the September $5.0 strike where some 710 calls were picked up for an average premium of $0.54 a-pop. Bulls frequented North American Palladium call options earlier in the week, as well. It looks like open interest at the August $4.0 and $5.0 strike call is largely made up of buyers who paid an average premium of $0.30 and $0.12 per contract for roughly 1,000 call options at each strike. Demand for PAL’s call options may also be elevated ahead of the company’s second-quarter earnings report on August 11. In addition, PAL was raised to ‘Outperform’ from ‘Sector Perform’ with a 12-month target share price of $6.00 at RBC Capital Markets this week. The overall reading of options implied volatility on the mining company rose 11.2% to 62.32% this afternoon.

VMED - Virgin Media, Inc. – Large prints in Virgin Media calls pushed the provider of entertainment and communications services onto our ‘most active by options volume’ market scanner within the first 30 minutes of the opening bell. Shares in Virgin are off their highs of the session, but remain in rally-mode with the price of the underlying up 1.05% at $28.01 as of 12:50 pm in New York. It looks like investor responsible for the large ratio call spread initiated on VMED is taking advantage of the 17.0% decline in the price of the stock since the end of May when shares touched an all-time high of $33.32. The ratio call-spreader appears to be positioning for shares to bounce back up to the $33-level over the next six months. The investor picked up 10,000 calls at the January 2012 $29 strike for an average premium of $2.125 each, and sold 20,000 calls at the higher January 2012 $33 strike at an average premium of $0.775 apiece. Net premium paid to establish the bullish spread amounts to $0.575 per contract. Thus, the trader is poised to profit should VMED’s shares rise 5.6% over the current price of $28.01 to top the average breakeven point on the spread at $29.575 at expiration next year. Maximum potential profits of $3.425 per contract pad the investor’s wallet in the event that Virgin’s shares soar 17.8% to settle at $33.00 at expiration day in January. The short stance in twice as many higher-strike calls expose the trader to losses should the price of the underlying rally more sharply than the investor anticipates. But, premium received on the position by the time shares surpass $33.00, acts as a buffer against losses up to the upper breakeven share price of $36.425. Virgin Media is scheduled to report second-quarter earnings ahead of the opening bell on July 27.

ADLR - Adolor Corp. – The biopharmaceutical company popped up on our scanners this morning after one strategist initiated a bullish stance on the stock in October contract call options. Shares in ADLR are currently up 6.4% at $2.48 as of 12:00 pm ET. In the past four weeks ADLR shares jumped 91.2% to reach a new 52-week high of $2.83 on Monday. Shares took off in mid-June after the company announced an agreement to acquire full ownership of ENTEREG, an approved gastrointestinal drug, from partner GlaxoSmithKline. One investor populating ADLR options is signaling shares may extend gains over the next several months. It looks like the trader employed a bull call spread, buying 3,000 calls at the October $2.5 strike for a premium of $0.45 each, and selling the same number of calls up at the October $5.0 strike at a premium of $0.05 apiece. Net premium paid to initiate the spread amounts to $0.40 per contract, thus positioning the investor to profit should shares in Adolor Corp. rally another 16.9% over the current price of $2.48 to surpass the effective breakeven point at $2.90 by October expiration day. Maximum potential profits of $2.10 per contract are available to the trader should ADLR shares soar 101.6% to exceed $5.00 at expiration. The size of the call spread is massive relative to the 673 contracts of previously existing open positions in ADLR options.

VIP - VimpelCom Ltd. – Russia’s second-largest mobile phone operator attracted the attention of at on big options strategist who may be expecting shares in VimpelCom to rally ahead of September expiration. Shares in the telecommunications company are currently down 1.5% to stand at $12.10 as of 2:15 pm ET, which is just one penny above VIP’s 52-week low of $12.09. The stock has surrendered roughly 1/3 of its value since August 2010 when shares were up around $18.00. The investor responsible for generating nearly all of the volume in VimpelCom options today appears to be positioning for shares to rebound. The investor exchanged 10,000 calls at the September $12.5 strike for an average premium of $0.43 per contract. The calls traded to the middle of the market, but premium on the contracts was far closer to the asking price at the time of the transaction. Long calls at this strike position the trader to profit should VIP’s shares increase 6.9% to trade above the breakeven price of $12.93 by expiration in September. But, it’s possible the investor is selling rather than buying the call options. If the investor is short the calls, he keeps the $0.43 in premium per contract as long as the options expire worthless at expiration in a couple of months. Implied volatility on the mobile communications company is up 12.9% at 31.95% this afternoon.

Andrew Wilkinson
Senior Market Analyst
[email protected]

Caitlin Duffy
Equity Options Analyst

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North American Palladium Draws Bullish Bets
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