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Protective Puts In Play As Eli Lilly Shares Reach Multi-Year High

Posted on the 17 July 2012 by Phil's Stock World @philstockworld

Today’s tickers: LLY, NTES & HIG

LLY - Eli Lilly and Co. – Shares in the world’s 10th largest pharmaceutical company touched a fresh three-year high of $44.27 today and remain in positive territory, up 0.35% at $44.00 as of 11:20 a.m. in New York, as major U.S. equity benchmarks rebound off earlier declines amid Fed Chairman Ben Bernanke’s Q&A session with the Senate Banking Committee. Options activity on the drug maker today suggests one or more traders may be locking in Lilly’s share price gains in case the stock falters somewhat during the next couple of months. It looks like a 1,100-lot Sept. $39/$43 put spread was purchased this morning for an average net premium of $1.32 per contract. The debit put spread may represent protective positioning by a trader or traders seeking to hedge long stock in LLY, or an outright bearish bet that the shares may pullback by expiration. Profits – or downside protection – kick in on the spread in the event Lilly’s shares decline 5.3% to breach the average breakeven price of $41.68. Maximum potential profits of $2.68 per contract are available on the position should the drug maker’s shares drop 11.4% to trade at or below $39.00 come September expiration. Meanwhile, trading traffic in Lilly call options indicates some strategists may anticipate fresh multi-year highs for the stock this year. One bullish player appears to have rolled a 500-lot long call position from the July $44 strike out to the Sept. $44 strike to extend optimism on the name. Traders betting on a far larger move to the upside snapped up around 480 calls at the Sept. $50 strike for an average premium of $0.68 apiece. The $50 calls may be profitable at expiration if shares in Eli Lilly and Co. jump 15% over the current price of $44.00 to top $50.68. The company is scheduled to report second-quarter earnings ahead of the open next Wednesday.

NTES - NetEase, Inc. – The Chinese Internet company’s shares kicked off the trading session in rally mode on Tuesday morning, but modest gains were quickly replaced with steep losses as the stock dropped 7% to touch down at an intraday low of $52.81. NetEase joined other Chinese Internet stocks such as Sina Corp. and Baidu Inc. in selling off on continued concern the world’s second-largest economy is slowing. NTES shares are down roughly 20% off the June 7th all-time high of $65.54. Put options on NetEase are more active than usual today, with around 18.5 of the contracts changing hands for each single call option in play on the stock. Overall options volume of 16,150 contracts today compares to paltry average daily volume of just 824 contracts. It looks like a number of options market participants are snapping up downside puts to position for the stock to potentially extend losses in the next few months. Trades suggesting the stock could tumble another 30% from here include the purchase of a few hundred contracts at the Sept. $37 and $38 strikes for $0.53 and $0.58 each, respectively. Volume in the Sept. $40 strike put soared to 6,800 contracts in the first half of the session, though time and sales indicates both buyers and sellers are responsible for the activity. Bearish strategies may pay off in the event NetEase’s shares continue to sell off ahead of expiration.

HIG - Hartford Financial Services Group, Inc. – The insurer’s shares are down 0.40% at $16.49 today after the company projected second-quarter catastrophe losses could reach $280-$300 million. Hartford Financial Services Group is scheduled to report second-quarter earnings after the final bell on August 1st. The stock popped up on our scanners this morning after a large block of put options changed hands at the Aug. $15 strike. All told, more than 5,100 put options changed hands at that strike versus previously existing open interest of just 551 contracts. The single-largest print, a block of 3,150 puts, traded to the middle of the market at a premium of $0.30 apiece, while roughly 1,000 lots traded on the bid at $0.30 each. Sellers of the put options walk away with the full amount of premium as long as shares in HIG exceed $15.00 through August expiration.

Caitlin Duffy
Equity Options Analyst

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Protective Puts In Play As Eli Lilly Shares Reach Multi-Year High
Protective Puts In Play As Eli Lilly Shares Reach Multi-Year High
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