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Private Equity Chatter Drives Bullish Activity In HOT Call Options

Posted on the 02 November 2011 by Phil's Stock World @philstockworld

HOT - Starwood Hotels & Resorts Worldwide Inc. – Call options on the owner and operator of brand-name, upscale, full service hotels, including W®, Westin® and Le Meridien®, are changing hands at a rapid clip this morning. Shares in the hotel and leisure company rallied sharply on Wednesday, rising as much as 7.7% to an intraday high of $52.05 in the first half of the session. HOT calls may be active on renewed private equity takeover chatter, according to flyonthewall.com. Indeed, it does seem many players populating Starwood options today are positioning for the price of the underlying to rally substantially by year end. Trading traffic is heaviest at the Nov. $55 strike, where more than 10,400 calls changed hands against open interest of 1,974 contracts. It looks like most of these call options were purchased for an average premium of $0.60 per contract. Bulls long the calls profit at expiration if shares in Starwood Hotels rally another 6.8% over today’s high of $52.05 to surpass the average breakeven price of $55.60. Call volume is heavy in the December contract, as well. Traders appear to have purchased more than 1,300 calls at the Dec. $55 strike for an average premium of $1.39 each, and picked up another 760 call options up at the Dec. $57.5 strike at an average premium of $0.73 a-pop. Higher-strike call buyers may profit at December expiration in the event that HOT’s shares jump 11.9% to exceed the average breakeven point on the upside at $58.23. Investors have exchanged more than 27,000 option contracts on the stock as of 11:30 am in New York.

QCOM - Qualcomm, Inc. – Large prints in Qualcomm call and put options appear to be the work of an investor putting the strangle-hold on the stock heading into the company’s fourth-quarter earnings report after the close of trading today. The short strangle benefits the trader most if the stock trades within a range of $50.00 and $52.50 at expiration in a couple of weeks. Shares in QCOM rose 2.8% to $51.55 in the first half of the session. It looks like the strangle-strategist sold 10,000 calls at the Nov. $52.5 strike for a premium of $1.70 each, and sold 10,000 puts at the lower Nov. $50 strike at a premium of $1.50 apiece. Premium pocketed on the position amounts to $3.20 per contract. The investor may keep the full amount of premium as long as Qualcomm’s shares settle within the $50/$52.5 range specified by the strike prices at expiration. Breakeven prices of $55.70 to the upside, and $46.80 on the downside, mark points at which the investor sees gains on the strangle completely disappear. If shares in QCOM break outside of these breakeven prices, the trader may be forced to swallow substantial losses on the position. Qualcomm’s shares have traded within a range of $46.80 to $55.70 during almost all of the trading sessions since July 27, 2011.

XRT - SPDR S&P Retail ETF – Put butterfly spreads are dominating the XRT for a second consecutive day, despite the more than 2.0% rally in the price of the underlying to $52.99 this afternoon. The rise in the shares today helped shave two pennies off the net cost of positioning for limited bearish movement in the XRT over the next couple of weeks. It looks like the investor responsible for the newest put ‘fly purchased 10,000 puts at the Nov. $51 strike, sold 20,000 puts at the Nov. $47 strike, and picked up 10,000 puts at the lower Nov. $43 strike, all for a net premium outlay of $0.51 per contract. The strategist, who may or may not be the same party responsible for the larger spread implemented yesterday, may profit at expiration if shares in the XRT drop 4.7% to breach the effective breakeven point on the downside at $50.49. Maximum potential profits of $3.49 per contract pad the investor’s wallet in the event that shares in the ETF plunge 11.3% from the current price of $52.99 to settle at $47.00 at expiration. The investor may lose the full $0.51 paid to establish the spread if shares in the XRT settle above $51.00 or below $43.00 at expiration later in the month.

GRMN - Garmin, Ltd. – Shares in the maker of portable GPS receivers and accessories rallied better-than-expected third-quarter earnings released ahead of the opening bell this morning. While Garmin’s net income in the quarter fell versus the same quarter in 2010, the $0.77 a share earned by the company handily beat expectations, on average. Garmin raised estimates for the year, helping shares rise as much as 8.8% to an intraday- and new 52-week high of $37.20. Investors positioning for shares in the name to extend gains in the near term purchased more than 1,350 call options at the Nov. $38 strike for an average premium of $0.34 per contract. Call buyers profit at expiration in a few weeks if shares in Garmin top the average breakeven price of $38.34. The stock last traded above $38.34 in May 2010. Options implied volatility on the stock is down 18.1% at 29.6% as of 11:45 am on the East Coast.

Caitlin Duffy
Equity Options Analyst

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