Option Activity Alert: Ensco PLC, Fluor, SandRidge Energy

ESV – Ensco PLC – The provider of offshore contract drilling services to the oil and gas industry popped up on our ‘hot by options volume’ market scanner in this first half of the trading session after one options trader dabbled in near-term put options. Shares in Ensco are down 0.35% to arrive at $49.70 as of 12:05 pm. According to the Wall Street Journal, London-based Ensco has been in takeover talks with Pride International, a U.S. company that is considering putting itself up for sale. Seadrill Ltd., an Oslo-listed firm, is reportedly also eyeing Pride as a potential takeover target. The put player populating ESV today appears to be rolling out of a previously established position in deep out-of-the-money puts and initiating a fresh ratio put spread in the November contract. It looks like the trader may have originally sold 2,600 puts at the November $43 strike for a premium of $0.65 per contract back on October 19, 2010, when the ESV shares were trading around $46.67. Premium on these put options has collapsed with the rise in the price of the underlying, allowing the investor to buy back the contracts for $0.06 each today. Next, the investor employed a completely different strategy that appears to be a protective play on ESV in case shares continue to slide ahead of November expiration. The trader initiated a ratio put spread, purchasing 2,080 puts at the November $49 strike at an average premium of $0.875 each, and selling 4,140 puts at the lower November $46 strike for a premium of $0.20 apiece. The net cost of the spread amounts to $0.475 per contract, thus establishing limited downside protection in the event that ESV’s shares fall 2.35% from the current price and trade below the average breakeven point at $48.525 ahead of expiration day. Of course, it is also possible that the investor is not using the spread to hedge a long position in the underlying shares. In this case, the transaction is an outright bearish bet that shares are set to decline. The trader in this scenario stands ready to amass maximum potential profits of $2.525 per contract if shares fall 7.4% from the current price of $49.70 to settle at $46.00 at expiration. In either scenario, the trader could wind up having 204,000 shares of the underlying stock put to him at $46.00 each if the put options at the lower strike land in-the-money at expiration. But, in initiating this position, the investor has already weighed such risks and this suggests he does not expect ESV’s shares to collapse too substantially in the next couple of weeks because he will face losses over and above the premium paid for the ratio spread if shares slip beneath a lower breakeven price of $43.475 ahead of November expiration.

FLR – Fluor Corp. – Shares of the largest publicly traded construction company surged as much as 13.1% today to touch an intraday- and new 52-week high of $56.32 after the firm increased its share buybacks by 7.2 million to a total of 12 million shares and announced David Seaton will succeed CEO Alan Boeckmann starting February 3, 2011. Fluor’s shares are currently up 10.45% at $55.01 as of 12:40 pm. A number of options traders are taking bullish positions on the stock this afternoon by picking up calls and selling puts in the November contract. Investors picked up approximately 2,600 in-the-money calls at the November $55 strike for an average premium of $0.97 per contract. Call buyers at this strike make money if Fluor’s shares rally 1.745% over the current price of $55.01 to surpass the average breakeven price of $55.97 ahead of November expiration. Optimism spread to the higher November $60 strike where another 1,300 call options were coveted for an average premium of $0.20 apiece. Finally, bullish players appear to have sold some 2,900 puts at the November $55 strike for an average premium of $1.32 per contract. Put sellers keep the full premium received on the transaction as long as FLR’s shares exceed $55.00 through expiration day. Investors employing this tactic are apparently happy to have Fluor shares put to them at an effective price of $53.68 each in the event that the puts land in-the-money by expiration in a couple of weeks. News of the appointment of the CEO’s successor and the boost in FLR’s repurchase program helped ease the stock’s overall reading of uncertainty, sending options implied volatility 9.1% lower to 30.43% as of 12:45 pm in New York trading.

SD – SandRidge Energy, Inc. – Weaker-than-expected third-quarter earnings out of the Oklahoma City-based natural gas and oil company sent its shares sharply lower today and inspired some options traders to throw in the towel. SandRidge’s shares fell as much as 17.235% this morning to secure an intraday low of $4.85 after the company posted a net loss of $0.06 a share, which disappointed analysts looking for positive earnings of $0.02 a share. Within the first 15 minutes of the trading day, options traders abandoned hopes of SD’s shares rebounding substantially ahead of December expiration and ditched previously established bullish positions on the stock. More than 47,000 calls changed hands at the December $6.0 strike today for a premium of $0.10 each, with the majority of today’s volume generated by sellers opting to take the money and run. Open interest at that strike is sufficient to cover the number of calls traded there today. Upon further inspection, it looks like open interest was mostly built up between July 29 and August 6 at premiums ranging from $0.35 to $0.87 each. SandRidge’s overall reading of options implied volatility is down 10.2% to stand at 52.67% following earnings.

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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