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WebMD Options In Play As Shares Nosedive

Posted on the 10 January 2012 by Phil's Stock World @philstockworld

Today’s tickers: WBMD, AMAT & BRCD

WBMD - WebMD Health Corp. – Shares in the health information services provider dropped like a rock, falling 32.0% to as low as $25.01 on Tuesday, on news talks to potentially sell the company have ended, net income is expected to be lower in 2012, and the CEO of the company has resigned. The steep pullback in the price of the underlying saw heavier-than-usual activity in WebMD calls and puts, with intraday volume rising to 14,800 in early-afternoon trade against overall open interest of 29,100 positions. Though some strategists engaged in bearish put buying in the name, it appears much of the action was initiated by investors gearing up for a potential rebound in the stock. Roughly 1.6 call options changed hands on WebMD for each single put option in play thus far in the session. Calls are most active at the Jan. $30 strike where more than 2,200 contracts traded against open interest of just 4 positions. Earlier this morning, with shares hovering around $26.00, investors paid an average of $0.35 per contract for the right to buy the stock at $30.00 by January expiration. The modest intraday recovery since then has lifted premium to buy the calls up to $0.50 as of 1:40 PM in New York. Traders long the calls at an average of $0.35 each may profit at expiration if shares in WBMD surge 13.25% over the current price of $26.80 to exceed the average breakeven point at $30.35. Meanwhile, put buyers in the front month at the $22.5 and $25 strikes may see the value of their options rise if shares take another hit ahead of expiration next week.

AMAT - Applied Materials, Inc. – A large trade in Applied Materials call options launched the semiconductor equipment company onto our ‘most active by options volume’ market scanner this morning. A transaction involving the sale of a single block of 72,500 calls is by far the largest options position in the name, and is hefty compared to the overall open interest on the stock of 298,340 contracts. Shares in AMAT today rose 2.3% to $11.60. The sale of the July $12 strike calls 72,500 times for a premium of $0.78 per contract was tied to the purchase of 3,335,000 shares of the underlying stock for $11.6152 each, on a 46 delta. The delta hedged position, a synthetic short put, suggests the strategist is modestly bullish on Applied Materials over the first half of the 2012. AMAT pays a dividend, which the investor enjoys by holding the long stock, while premium received on the sale of the calls acts as a buffer against limited bearish movement in the price of the underlying. Shares need not move at all between now and July expiration for the position to be profitable given the quarterly dividend and the $0.78 premium received on calls. Time decay works in the investor’s favor as the call options will expire worthless in July if shares settle below $12.00. The strategy may result in losses, however, if the price of the underlying slides sufficiently to overwhelm dividend income and premium on the sale of the options at expiration.

BRCD - Brocade Communications Systems, Inc. – Shares in the maker of switches for data-storage networks rallied to their highest intraday level in nearly six months on Monday after a Reuters report said the company received bids from potential buyers. The stock is up 1.2% today to stand at $5.84 as of 12:20 PM in New York. Activity in Brocade Communications call options suggests at least one options player is positioned for the price of the underlying to extend gains in the first four months of the year. It looks like the investor initiated a bull call spread for a net premium outlay of $0.825 per contract, purchasing 5,000 in-the-money calls at the April $5.0 strike and selling the same number of calls up at the April $7.0 strike. The trader stands ready to profit should shares in Brocade exceed the average breakeven price of $5.825 at expiration in April. Maximum potential profits of $1.175 per contract are available on the position in the event that the price of the underlying soars 20.0% to top $7.00 at expiration day. Shares in the name last traded above $7.00 back on June 7, 2011.

 

Caitlin Duffy
Equity Options Analyst

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