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Options Suggest Carnival Corp. Rally Is Running On Empty

Posted on the 11 August 2011 by Phil's Stock World @philstockworld

Today’s tickers: CCL, ELX, OVTI & KKR

CCL - Carnival Corp. – Shares in the provider of cruise vacations are up 3.0% at $30.30 in early-afternoon trade, but options activity on the stock indicates the rally may lose steam. Investors appear to be selling in- and out-of-the-money calls on the cruise operator today perhaps on the expectation that today’s stock market rally represents but a brief respite from painful market pullbacks on the horizon. Abundant signs the market is slowing coupled with potential debt disasters overseas could dampen consumers’ willingness to spend hard-earned money on a non-essential cruise vacation. Shares in Carnival currently hover just above Wednesday’s fresh 52-week low of $29.35. Traders expecting Carnival’s shares to sink below $30.00 by expiration next month sold some 8,500 calls at the September $30 strike to pocket an average premium of $1.80 per contract. Call sellers keep the full amount of premium received as long as CCL’s shares fail to exceed $30.00 at expiration day. Premium received on the sale acts as a buffer against potentially uncapped losses to the upside, but protection gives way in the event that shares exceed the effective breakeven price of $31.80. Call selling spread to the higher September $32 strike where some 200 lots sold for an average premium of $0.92 a-pop. Reminders of the strong headwinds to growth going forward would likely once again spur investors to abandon ship on consumer discretionary names such as Carnival. The call options sold today expire several days ahead of CCL’s third-quarter earnings report on September 20.

ELX - Emulex Corp. – Shares in the provider of networking convergence solutions and equipment rose 1.6% this afternoon to $6.92, led higher by the broad market rally in U.S. stocks and Cisco’s better-than-expected fourth-quarter earnings report. Emulex is slated to post its fourth-quarter results after the final bell this afternoon. Some options players are assuming bullish stances on the stock ahead of earnings, and positioning for shares in ELX to extend gains through October expiration. Traders purchased more than 2,600 calls at the October $8.0 strike against open interest of just 178 contracts. Call buyers paid an average premium of $0.30 per contract and stand ready to profit should shares in Emulex surge 20.0% in the next couple of months to surpass the effective breakeven price of $8.30 at expiration. Shares in ELX were trading above $8.30 earlier this month. The stock has nearly halved in value since the start of 2011, but may recover some of those losses in the event that bullish strategists are on point with their predictions for a rebound.

OVTI - OmniVision Technologies, Inc. – Signs of optimism popped up in OmniVision options straight out of the gate this morning, with shares in the maker of CameraChips image sensors rebounding sharply off the week’s lows. Strategists responsible for large prints in OVTI put options appear to be taking profits off the table by unraveling recently initiated bearish spreads, while plain-vanilla call buyers initiate fresh bullish stances on the stock. Shares in OmniVision Technologies rallied as much as 13.2% today to $26.87. Earlier this week, the stock dipped to its lowest since February on the heels of a rapid 35.0% slide in the share price during the past 2 weeks. It looks like one or more prudent investors that were watching OVTI shares drop purchased a number of sizable put spreads in the September contract last week and at the end of July. In hindsight, those positions were well-timed as the stock continued to give up ground after the bearish spreads had been purchased. Shares in OVTI dropped well beneath the lowest strike price targeted by put players – the September $25 strike – this week and last, but have since sharply bounced back. Investors appear to have dismantled a number of the spreads today to take in profits and get out of the way of today’s hefty rebound in the price of the underlying. September contract put options are by far the most active on OmniVision this afternoon, with more than 45,000 puts crossing the tape by 1:45 pm ET.

Meanwhile, bulls are positioning for the recovery in OmniVision’s shares to continue through September expiration. Options players exchanged more than 2,000 now deep in-the-money calls at the September $25 strike against previously existing open interest of 984 contracts. It looks like most of the calls were purchased for a premium of $2.15 apiece early in the trading session. Call buyers profit if shares in OmniVision Technologies rally another 1.0% to exceed the breakeven price of $27.15 by September expiration. Buyers of the calls at $2.15 this morning are now holding options that cost $3.80 per contract as of 1:35 pm ET. OmniVision is scheduled to report first-quarter earnings after the market closes on August 25.

KKR - KKR & Co. LP – The provider of asset management services popped up on our scanners due to heavier-than-usual trading in its call options. KKR’s shares are up 7.9% at $11.35 this afternoon, but call activity indicates some traders expect the stock to give up those gains ahead of August expiration next Friday. KKR was cut to ‘neutral’ from ‘buy’ at Goldman Sachs today. Options players exchanged more than 8,300 in-the-money calls at the August $11 strike against previously existing open interest of just 5 contracts. Nearly all of the calls appear to have been sold outright for a premium of $0.41 per contract. Call sellers walk away with the full amount of premium received as long as the price of the underlying trade below $11.00 at August expiration next week. If shares continue to rise, sellers of the options face unbridled losses above the effective breakeven price of $11.41.

Andrew Wilkinson
Senior Market Analyst
[email protected]

Caitlin Duffy
Equity Options Analyst

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Options Suggest Carnival Corp. Rally Is Running On Empty
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