Option Activity Alert: Cavium Networks, Ross Stores, Wilmington Trust

CAVM – Cavium Networks, Inc. – Investors initiated put spreads on the provider of semiconductor processors this morning ahead of the firm’s third-quarter earnings report, scheduled for release after the closing bell on October 27, 2010. Cavium’s shares increased 1.70% to stand at $29.43 by 11:30 am ET. Put spreaders may be establishing outright bearish bets on the stock heading into earnings, or could be building up downside protection on long positions in CAVM shares. Traders purchased 17,000 puts at the November $29 strike for an average premium of $1.75 each, and sold the same number of puts at the lower November $25 strike at an average premium of $0.40 apiece. Put players paid a net premium of $1.35 per contract for the transaction. Thus, investors start to make money if Cavium’s shares fall 6.05% from the current price of $29.43 to breach the effective breakeven point on the spread at $27.65 by November expiration. Maximum potential profits of $2.65 per contract are available to investors if CAVM’s shares plunge 15.05% lower to trade under $25.00 by expiration day next month.

ROST – Ross Stores, Inc. – The operator of off-price retail apparel and home accessories stores popped up on our ‘hot by options volume’ market scanner after one options strategist initiated a ratio put spread in the November contract. Shares are currently up 0.25% at $54.59 just before 12:00 pm ET. Put options utilized in the spread expire on November 19, which is one day after Ross Stores is scheduled to report third-quarter earnings. The investor purchased 2,500 in-the-money puts at the November $55 strike for an average premium of $3.025 apiece, and sold 5,000 puts at the November $50 strike for a premium of $1.00 each. Net premium paid to establish the transaction amounts to $1.025 per contract. Thus, the investor is positioned make money if ROST shares decline 1.1% from the current price to slip beneath the effective breakeven point to the downside at $53.975 by expiration day next month. Maximum potential profits of $3.975 per contract are available to the trader should shares plummet 8.40% to settle at $50.00 at expiration. The greater proportion of sold puts indicates the trader is not expecting shares to collapse under $46.205, or the price at which losses would start to accumulate to the downside.

WL – Wilmington Trust Corp. – Shares of the financial holding company fell as much as 5.00% in morning trading to touch down at an intraday- and new 52-week low of $8.33. The stock has parsed a portion of earlier losses to trade 1.95% lower on the day at $8.60 as of 12:15 pm ET this afternoon. Investors expecting Wilmington’s shares to continue lower ahead of November expiration scooped up put options. Options traders have thus far exchanged 6,154 contracts on the financial firm, which is substantial in comparison to the 7,600 lots of previously existing open interest on the stock. Put players appear to have purchased approximately 4,400 puts at the November $7.5 strike for an average premium of $0.39 each. Investors long the puts are prepared to make money should WL shares fall another 17.325% from the current price of $8.60 to breach the average breakeven point at $7.11 by expiration day. Options implied volatility on the stock jumped 28.86% to 60.59% in the second half of the trading session. Wilmington Trust Corp. is scheduled to report third-quarter earnings ahead of the opening bell on October 22, 2010.

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

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