Option Activity Alert: RF, YHOO, ORLY, CTV

RF – Regions Financial Corp. – Bears are piling into put options on Regions Financial Corp. today after Fitch Ratings cut Alabama’s biggest lender by two levels to –BBB, citing concerns the firm may post additional losses. Regions’ credit rating was also downgraded two notches to Ba3 from Ba1 at Moody’s yesterday. Shares have been hammered lower over the past four weeks, and today declined as much as 7.22% to touch an intraday- and new 52-week low of $5.14. Today’s low of $5.14 marks a 46.5% decline since October 21, 2010, when shares touched an intraday high of $7.53. Investors expecting shares to extend losses over the next several months purchased large numbers of put options on the stock. Bearish players picked up at least 9,000 puts at the December $5.0 strike for an average premium of $0.28 each and purchased approximately 10,000 puts at the lower December $4.0 strike at an average premium of $0.20 apiece. Lower-strike put buyers are positioned to profit should Regions’ shares slide another 26% below today’s intraday low point of $5.14 to breach the effective breakeven point on the downside at $3.80 by expiration day in December. Pessimism spread to the January 2011 $4.0 strike where another 3,800 put options were coveted at an average premium of $0.20 a-pop. The surge in demand for put options coupled with growing uncertainty regarding the fate of RF’s shares going forward helped lift the stock’s overall reading of options implied volatility 27.4% to 90.77% by 3:50 pm in New York.

YHOO – Yahoo!, Inc. – Shares in Yahoo! are up 5.35% to $17.01 as of 2:40 pm in New York, but earlier rallied as much as 6.315% to hit an intraday high of $17.17. Call options on the stock are flying off the shelves this afternoon with investors exchanging more than 8.4 calls on the stock for each single put option in play thus far in the session. Calls at the December $19 and $21 strikes are by far the most heavily trafficked. The majority of the volume, some 40,950 calls at the Dec. $19 strike and about 34,490 calls at the Dec. $21 strike, was generated in one fell swoop by one bullish player establishing a debit call spread. It looks like the initial print of the spread involved the purchase of 21,000 calls at the Dec. $19 strike at a premium of $0.36 each, marked against the sale of the same number of calls up at the Dec. $21 strike for a premium of $0.12 apiece. The net cost of the spread amounts to $0.24 per contract and prepares the trader to make money should shares in Yahoo! surge 13.1% over the current price of $17.01 to trade above the effective breakeven price of $19.24 ahead of expiration day next month. Maximum potential profits of $1.76 per contract pad the investor’s wallet if the price of the underlying stock jumps 23.45% to exceed $21.00 by expiration in December. Options implied volatility on the search engine is up 21% at 44.71% in late afternoon trading.

ORLY – O’Reilly Automotive, Inc. – The specialty retailer of automotive aftermarket parts, tools, supplies and accessories attracted bullish options traders during the session. Shares in O’Reilly rose as much as 2.00% earlier today to hit an intraday high of $60.00 after analysts at Nomura initiated the stock as ‘neutral’ with a share price target of $65.00. Investors hoping the auto parts seller extends gains throughout the rest of the trading week scooped up more than 2,150 calls at the November $60 strike for an average premium of $0.13 apiece. Call buyers make money if shares in O’Reilly Automotive exceed the average breakeven price of $60.13 by the time the contracts expire tomorrow. Approximately 3,200 calls changed hands at the November $60 strike, which is more than 5.75 times greater than the 555 lots representing previously existing open interest in calls at that strike. Optimism on O’Reilly follows the November new-vehicle retail sales report that showed sales exceed 10 million units for the second month running. The positive report is one sign that natural demand is starting to return to the marketplace. Options implied volatility on the auto parts company is down 10.9% at 22.08% this afternoon.

CTV – CommScope, Inc. – Yesterday, the telecommunications equipment company that agreed to be taken private in a $3.9 billion acquisition by leveraged-buyout firm Carlyle Group back on October 27, was granted early termination of the waiting period in connection with the merger agreement. CommScope originally had until December 5, 2010, to shop around for a better offer. Shares in CTV are currently up 0.2% to stand at $32.00 as of 1:30 pm. CTV appeared on our scanners today after one investor booked profits by rolling a previously established long call position up to a higher strike price in the December contract. It looks like the trader purchased 10,000 calls at the November $31 strike for a premium of $0.55 each back on October 27, when news of the agreed upon LBO hit the stands. Shares at the time were trading around $31.33. The rise in the price of the underlying stock since the calls were purchased lifted premium on the now deep in-the-money calls, allowing the investor to sell all 10,000 lots for a premium of $1.00 per contract today. Net profits on the sale amount to $0.45 per contract. Next, the trader extended bullish sentiment on the stock by purchasing 10,000 fresh lots at the higher December $32 strike for a premium of $0.65 apiece. The investor may profit on the new position ahead of December expiration if CommScope’s shares rally another 2.00% to surpass the effective breakeven price of $32.65. CTV’s shares last traded up at a 52-week high of $34.95 back on April 30, 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.

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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