Option Activity Alert: CBS, REP, GAP

CBS – CBS Corporation – The media company popped up on our ‘hot by options volume’ market scanner in the first half of the trading session after one investor booked profits on a previously established bullish position. Shares of the mass media company are currently flat on the day at $17.90 as of 11:45 a.m., but earlier rallied 1.675% to touch a new 52-week high of $18.20. The firm’s shares have surged 39.9% to $18.20 since reaching a 3-month low of $13.10 on August 25, 2010. It looks like the investor originally purchased 4,000 calls at the October $17 strike at an average premium of $0.35 each back on September 13, 2010, when CBS Corp.’s shares were trading around $15.69. The subsequent appreciation in the price of the underlying shares significantly increased premium on the calls, which are now trading in-the-money. Thus, the investor sold all 4,000 lots today for a premium of $1.10 each to pocket net profits of $0.75 per contract. It appears the same trader is also positioning for the media company’s shares to climb higher by scooping up a fresh batch of 4,000 calls at the higher November $20 strike at a premium of $0.25 a-pop. The investor makes money on the new position if shares in CBS Corp. rally another 11.25% over today’s high of $18.20 to trade above the effective breakeven point at $20.25 by November expiration. CBS Corp. is scheduled to report third-quarter earnings after the final bell on November 4, 2010.

REP – Repsol YPF, SA – Shares of the Madrid, Spain-based oil and gas company are up 0.50% to stand at $27.85 as of 12:10 p.m., but options activity in the April 2011 contract this morning indicate one strategist is prepared for the price of the underlying stock to decline. The three-legged bearish combination play transacted on REP today follows news that the European Commission, the regulatory arm of the EU, plans to propose broader liability rules and stricter standards for offshore drillers in order to improve safety in the petroleum industry post-BP catastrophe. The options trader responsible for the pessimistic position sold 3,382 calls at the April 2011 $30 strike at a premium of $1.30 each, purchased the same number of puts at the April 2011 $25 strike for a premium of $1.80 per contract, and sold 3,382 puts at the lower April 2011 $20 strike at a premium of $0.40 apiece. Net premium paid to establish the spread amounts to just $0.10 per contract. The trader is poised to profit, or realize downside protection, if REP’s shares fall 10.6% from the current price of $27.85 to breach the effective breakeven point to the downside at $24.90 by expiration day in April. Maximum potential profits of $4.90 per contract pad the investor’s wallet should shares of the oil company plunge 28.2% to trade below $20.00 by expiration. Options implied volatility on the stock is up 5.3% at 36.03% as of 12:20 p.m.

GAP – The Great Atlantic & Pacific Tea Company – Put options on the operator of supermarkets are a hot commodity today with shares of the underlying stock falling as much as 21.1% this morning to secure an intraday low of $3.14. The company reveals second-quarter results before the market opens on October 20, 2010. Investors looking for shares to tumble lower scooped up some 4,600 puts at the May 2011 $2.0 strike for an average premium of $0.50 each. Put buyers make money if GAP’s shares plunge 52.2% lower to trade beneath the effective breakeven price of $1.50 each. From that point, traders may pocket maximum potential profits of $1.50 per contract in the event that shares collapse down to $0.00 by expiration in May 2011. The significant erosion in the price of GAP’s shares, increased demand for put options on the stock and impending earnings have lifted the overall reading of options implied volatility on the supermarket operator 51.9% to 123.13% as of 12:35 p.m. in New York.

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.

Interactive Brokers: Interactive Brokers offers direct market access to around 80 electronic global markets from a single account. Successful traders and investors understand that superior technology and lower trading costs can result in greater returns. For 32 years we have been building direct access trading technology that delivers real advantages to professionals worldwide. With consolidated equity capital of US $4.4 billion, IB and its affiliates exceed 1,000,000 trades per day. In addition, our prudent and conservative risk policies make Interactive Brokers a safe haven for your money. Discover some of the reasons why IB, the largest independent US broker/dealer, is the professional traders' and investors' choice.

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