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Value of Large Temple-Inland Call Spread Pops Post-IP Takeover Attempt

Posted on the 07 June 2011 by Phil's Stock World @philstockworld

Today’s tickers: TIN, CA, CTRP & VPRT

TIN - Temple-Inland, Inc. – Just under two weeks ago we made note of a sizable bullish transaction on Temple-Inland in which one strategist purchased a call spread in the January 2012 contract to position for a huge rally in shares of the corrugated packaging producer by expiration. As it turns out, the run-up in the price of the underlying stock arrived far sooner than predicted by the spread, with shares soaring 42.6% at the start of today’s session to an intraday- and multi-year high $29.97 following a hostile $3.31 billion takeover offer from International Paper Co. The bullish investor paid a net premium of $1.10 per contract back on May 25 – when shares in TIN were trading around $22.81 – for the 6,425-lot Jan. 2012 $25/$30 call spread. Call open interest at these strikes indicates the trader is still holding on to the position. To purchase the same Jan. 2012 $25/$30 call spread in the aftermath of the takeover bid, one would need to shell out a net premium of $3.70 per contract at present, which is $2.60 per contract more than the investor paid less than two weeks prior. Meanwhile, options traders taking to Temple-Inland today are focusing their attention on nearer-term contracts. Frenzied put selling is taking place at the June $29 strike where it looks like at least 6,500 puts sold for an average premium of $0.17 each. Traders short the puts keep the full amount of premium received on the transaction as long as shares in TIN exceed $29.00 through June expiration. Approximately 9,100 puts appear to have changed hands at that strike against zero open positions as of 11:45am in New York. Temple-Inland’s overall reading of options implied volatility is currently 32.8% lower to arrive at 23.76%.

CA - CA, Inc. – Activity in call and put options on the IT software and service company this morning suggests one investor expects greater volatility in the price of the underlying shares over the next few months. Shares in CA, Inc. are currently flat on the day to stand at $22.47 as of 12:15pm. It looks like a long strangle was initiated in the August contract with some 5,000 calls purchased at the August $23 strike for a premium of $0.85 each, and 5,000 puts picked up at the lower August $22 strike at a premium of $0.90 apiece. Net premium paid to initiate the strangle amounts to $1.75 per contract. Thus, the trader may benefit from a substantial rally or pullback in CA’s shares through expiration day. Profits are available to the investor in the event that shares climb 10.1% over the current price of $22.47 to exceed the upper breakeven point at $24.75, or if the stock falls 9.9% to breach the lower breakeven price of $20.25 by August expiration. CA’s shares last traded beneath $20.25 back in September 2010, but topped $24.75 as recently as May 12, 2011. The transaction could be profitable even if shares move very little as long as expectations for greater price volatility increase. Rising levels of implied volatility on the stock should work in the strangle-strategist’s favor and may allow him to sell the position at an advantageous price before the contracts expire in a few months time. The trader could wind up losing the full $1.75 per contract required to buy the strangle if shares fail to break out of the implied range at expiration. CA reports first-quarter earnings after the market closes on July 21.

CTRP - International, Ltd. – Demand for near-term put options on the Shanghai, China-based provider of travel-related services indicates some players are preparing for the price of the underlying stock to decline. Shares in International are currently down 0.40% to arrive at $42.44 in early-afternoon trade. The stock extended Monday’s pull back today along with shares in other Chinese companies such as Baidu and Sina Corp. on speculation traders are lightening up on risk as global growth concerns persist. Investors expecting the down-trend in CTRP’s shares to continue in the near future picked up more than 5,400 puts at the June $40 strike today for an average premium of $0.46 each. More than 7,600 puts changed hands at that strike thus far in the session on previously existing open interest of just 1,376 contracts. Put buyers profit if shares in drop 6.8% from the current price of $42.44 to breach the average breakeven point on the downside at $39.54 by expiration day. The stock has surrendered 16.1% since April 21, 2011, when shares were trading up at a 6-month high of $50.57.

VPRT - VistaPrint, Ltd. – The provider of direct marketing products and services popped up on our scanners due to bullish activity in July contract call options. It looks like one or more investors are buying bull call spreads to position for VistaPrint’s shares to extend gains through expiration next month. The price of the underlying stock is currently up 0.65% to trade at $47.88 as of 1:00pm in New York. Approximately 1,200 calls were purchased for an average premium of $1.09 each at the July $50 strike, while roughly the same number of calls sold at an average premium of $0.17 apiece up at the July $55 strike. The average net cost of the call spread amounts to $0.92 per contract. Bulls employing the strategy make money if VPRT’s shares rally another 6.3% over the current price of $47.88 to surpass the average breakeven point at $50.92 by expiration day. Maximum potential profits of $4.08 per contract are available on the spread should VistaPrint’s shares surge 14.9% to trade above $55.00 at July expiration. The calls expire ahead of the company’s fourth-quarter earnings report on July 28.

Andrew Wilkinson
Senior Market Analyst
[email protected]

Caitlin Duffy
Equity Options Analyst


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