Option Activity Alert: LVLT, AMGN, IBB

LVLT – Level 3 Communications, Inc. – Bullish tacticians made a bee-line for LVLT options this morning on news Netflix, Inc. agreed to have the Broomfield, CO-based firm provide video-streaming and storage services starting next year. Shares in Level 3 Communications shot up 17.475% to touch an intraday high of $1.21. Investors positioning for further near-term upside movement in the price of the underlying stock purchased calls and sold puts in the November contract. Bulls picked up about 1,000 in-the-money calls at the November $1.0 strike for an average premium of $0.20 each, while more optimistic individuals coveted more than 2,100 calls at the higher November $1.5 strike at an average premium of $0.05 apiece. Higher-strike call buyers make money if LVLT’s shares surge 28.1% over today’s high of $1.21 to surpass the effective breakeven price of $1.55 by November expiration. Other optimists sold approximately 2,000 in-the-money puts at the November $1.5 strike to take in an average premium of $0.29 per contract. Put sellers keep the full premium if LVLT shares exceed $1.50 by expiration day, but are apparently willing to have shares of the underlying put to them at an effective price of $1.21 each in the event that the puts land in-the-money at expiration. Call buyers also targeted the December $1.0 and June 2011 $1.5 strikes to initiate longer-term bullish stances on the stock. LVLT’s overall reading of options implied volatility is up 21.8% at 110.97% following the NFLX news and on increased demand for its options.

AMGN – Amgen, Inc. – Near-term bullish options traders expecting Amgen’s shares to rally are initiating debit call spreads on the biotechnology firm in the November contract. Amgen’s shares are down slightly by 0.15% as of 1:00 pm in New York to trade at $54.62. It looks like traders purchased roughly 13,000 calls at the November $55 strike for an average premium of $0.84 apiece, and sold about the same number of calls at the higher November $57.5 strike at an average premium of $0.22 each. Investors paid an average net premium of $0.62 per contract to establish the spreads. Thus, traders stand ready to make money should Amgen’s shares rally 1.83% over the current price of $54.62 to surpass the average breakeven point at $55.62 by November expiration day. Call spreaders may walk away with maximum potential profits of $1.88 per contract if shares in AMGN surge 5.3% to trade above $57.50 by expiration next Friday.

IBB – iShares Nasdaq Biotechnology Index Fund – The iShares Nasdaq Biotechnology Index Fund popped up on our ‘hot by options volume’ market scanner this morning after options strategists initiated three-legged bearish spreads in the December contract. Shares of IBB, an exchange-traded fund that seeks to provide investment results that correspond with the price and yield performance of the Nasdaq Biotechnology Index, are currently down 0.10% at $87.86 as of 12:05 pm in New York trading. It looks like the investors are preparing for shares to continue lower by essentially selling call options to offset the cost of debit put spreads. Traders sold 1,000 calls at the December $90 strike for an average premium of $1.01 each, picked up 1,000 puts at the December $85 strike at an average premium of $1.29 per contract and sold the same number of puts at the lower December $80 strike for an average premium of $0.44 a-pop. The three-legged transaction yields a net credit of $0.16 per contract, which investors keep as long as the December $90 strike calls land out-of-the-money at expiration. Additional profits start to accumulate should shares of the fund decline another 3.25% from the current price of $87.86 to trade below $85.00 by expiration day next month. Maximum potential profits, including the credit received, of $5.16 per contract are available to investors should shares in the IBB plunge 8.95% to breach the $80.00-level by December expiration.

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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