Option Activity Alert: EXCO Resources, Tenet Healthcare, Frontier Oil

XCO – EXCO Resources, Inc. – The oil and natural gas company was visited by one long-term bullish options investor in the second half of the trading session. It looks like the trader is expecting EXCO’s shares to rally significantly by expiration day in March of 2011. Shares of the Dallas, TX-based firm are up 2.05% at $15.53 with 30 minutes to go before the closing bell. The optimistic player appears to have sold put options and purchased a call spread. The investor shed 2,000 puts at the March 2011 $15 strike to pocket an average premium of $1.625 per contract. He keeps the full premium received on the sale as long as shares of the energy company exceed $15.00 through March expiration. The trader also initiated a debit call spread, buying 4,250 calls at the March 2011 $16 strike for a premium of $1.45 each, and selling 4,250 calls at the higher March 2011 $19 strike for an average premium of $0.475 apiece. Average net premium paid to establish the spread amounts to $0.975 per contract. Thus, the investor stands ready to make money if XCO shares jump 9.30% over the current price of $15.52 to surpass the effective breakeven point at $16.975 by expiration day. Maximum potential profits of 2.025 pad the investor’s wallet if the price of the underlying stock surges 22.3% to exceed $19.00 by March expiration. Risk exposure on the call spread is limited to $0.975 per contract paid for its purchase. However, the short position in put options implies the trader could have 200,000 shares of the underlying put to him at an effective price of $13.375 each if the puts land in-the-money by expiration day. The investor will start to absorb losses if shares trade below $13.375 ahead of expiration next year.

THC – Tenet Healthcare Corp. – Shares of the health care services company were in the red this morning, but recovered by late afternoon to rally as much as 1.80% to an intraday high of $4.50. One options strategist took a near-term bullish stance on the stock by selling 13,000 puts at the November $4.0 strike to pocket premium of $0.05 per contract. The put seller keeps the full $0.05 premium received on the transaction as long as Tenet’s shares exceed $4.00 through expiration day. Tenet Healthcare reports third-quarter results before the market opens on November 2, 2010. The sale of the put options indicates the investor is willing to have 1.3 million shares of the underlying stock put to him at an effective price of $3.95 apiece in the event that the puts land in-the-money at expiration. Options implied volatility on Tenet collapsed 21.7% to 43.80% in late afternoon trading.

FTO – Frontier Oil Corp. – Investors are buying up call options on the oil exploration and production company ahead of the firm’s third-quarter earnings report, scheduled for release ahead of the opening bell on November 4, 2010. Frontier Oil’s shares fell 2.115% to an intraday low of $13.42 earlier in the session, but have since recovered to stand 0.35% high on the day at $13.76 as of 1:15 p.m. in New York. Options traders taking a bullish stance on Frontier ahead of earnings purchased approximately 5,000 calls at the November $15 strike for an average premium of $0.23 per contract this morning. Call buyers are prepared to make money should shares of the oil company jump 10.7% over the current price of $13.76 to exceed the average breakeven price of $15.23 by November expiration. Options implied volatility is up 15.6% in early afternoon trading to arrive at 47.39%.

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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