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Sizable Call Spread Constructed On Pulte

Posted on the 13 September 2012 by Phil's Stock World @philstockworld

Today’s tickers: PHM, GE & FST

PHM - PulteGroup, Inc. – Shares in the homebuilder are down 1.3% this morning ahead of the Fed’s decision regarding further quantitative easing to trade at $15.35, giving up some of Wednesday’s 7% rally that lifted the stock to a four-year high of $15.70, on an intraday basis. Pulte’s shares moved up sharply yesterday on an upgrade to ‘Buy’ from ‘Hold’ with an increased target price of $17.00 from $13.00 at Williams Financial Group. Today, a large call spread initiated on Pulte suggests one big options market participant is positioning for shares in the homebuilder to extend their impressive run during the next 16 months. Since roughly this time last year, the stock has more than quadrupled, rising from a low of $3.29 on October 4th, 2011, to yesterday’s high of $15.70. The long-term bullish bet established in PHM options this morning yields maximum possible profits if the stock gains more than 60% by January 2014 expiration. The strategist responsible for the trade appears to have purchased 15,000 calls at the Jan. 2014 $15 strike for a premium of $3.75 each and sold the same number of calls at the Jan. 2014 $25 strike at a premium of $0.95 each. Net premium paid for the position amounts to $2.80 per contract and establishes an effective breakeven price of $17.80. Thus, the trader starts making money if the shares rally 16% to top $17.80, and could rake in maximum potential profits of $7.20 per contract in the event PHM’s shares soar 63% to top $25.00 by expiration.

GE - General Electric Co. – Options on General Electric are more active than usual this morning ahead of the Federal Reserve’s decision on whether to initiate a third round of bond buying to stimulate the economy. Heavy trading in GE Sep. 14 ’12 $22 strike weekly calls suggests one or more traders are preparing for shares in the name to potentially hit a fresh 52-week high this week. The stock is currently down 0.30% at $21.82 as of 12:25 p.m. ET, after yesterday trading up to $21.93, the highest since October 2008. More than 15,000 calls changed hands at the Sep. 14 ’12 $22 strike this morning versus open interest of just 1,740 contracts. It looks like nearly all of the volume was purchased for an average premium of $0.09 apiece. The strategy, perhaps a bet that GE will rally if the Fed opts for further easing, could pay off if shares in the name surpass the effective breakeven price of $22.09 by expiration. Call buyers may lose the full amount of premium paid for the contracts in the event that shares fail to make the required move to the upside by the end of the trading week.

FST - Forest Oil Corp. – Shares in Forest Oil are rallying for a third consecutive day, up 5.4% at present to stand at $8.65. The stock is extending gains on news released earlier in the week that the company named interim CEO, Patrick R. McDonald, its chief executive officer, effective immediately, and raised estimates for net sales volumes and capex for the second half of 2012. Though performing strongly this week, the stock is still down more than 35% since the start of the year. Options traders positioning for shares in Forest to continue to climb during the next five weeks snapped up October expiry calls this morning. The Oct. $9.0 and $10 strike calls are most active, with volumes in excess of 5,100 and 15,000 contracts, respectively, as of 1:00 p.m. in New York. Traders appear to be buying most of the volume, paying an average premium of $0.49 apiece for the $9.0 strike call and around $0.25 per contract for the $10 strike call in the first half of the trading session. Upside call buyers may profit at expiration next month if shares in the natural gas and crude oil producer manage to rally another 10% and 18.5% to exceed the average breakeven prices at $9.49 and $10.25, respectively. Overall options volume on Forest today of roughly 24,500 contracts as of 1:05 p.m. ET far exceeds the stock’s average daily options volume of 4,195 contracts. Most of the trading traffic is in calls, with the call-to-put ratio topping 20.1 this afternoon.

Caitlin Duffy
Equity Options Analyst

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Sizable Call Spread Constructed On Pulte
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