Option Activity Alert: LOW, NUAN, WAG, IFF

LOW – Lowe’s Companies, Inc. – The second-largest U.S. home improvement retailer popped up on our scanners within the first 20 minutes of the trading session after one investor appears to have initiated a sizeable risk reversal in the January 2011 contract. LOW’s shares are currently down 1.00% at $22.11 just before 10:55 am in New York trading. It looks like the options strategist purchased 910,000 shares of the underlying stock at a price of $22.15, sold 14,000 calls at the January 2011 $22.5 strike for a premium of $0.72 apiece, and purchased 14,000 puts at the lower January 2011 $20 strike at a premium of $0.30 each, on a 0.65 delta. The trade seems to have been built on the expectation that LOW’s shares will move sharply lower ahead of January 2011 expiration. The home improvement retailer’s shares underperformed the most recent S&P rally that was largely led by consumer-sensitive stocks. With the broad-market rally cooling off, the investor is predicting shares in LOW will slide lower in the next couple of months. Lowe’s shares hit their current 52-week low of $19.35 on August 11, 2010.

NUAN – Nuance Communications, Inc. – Shares of the speech-recognition software provider jumped 12.15% at the start of the trading day to hit an intraday- and new 2-year high of $19.19 after Apple Inc.’s Steve Wozniak said in a tech-blog video clip that the company recently purchased Nuance. NUAN posted better-than-expected fourth-quarter earnings after the closing bell on Monday, but did not mention any merger with Apple and today called Wozniak’s words speculative. The firm earned $0.33 a share, beating average analyst expectations by a penny. Shares in Nuance are currently up 4.9% at $17.95 as of 11:15 am. The takeover chatter sent speculators into a call-option feeding frenzy on Nuance right out of the gate this morning. Investors expecting shares in NUAN to continue higher picked up more than 1,500 calls at the December $19 strike for a premium of $0.64 each, and scooped up nearly 2,000 calls at the higher December $20 strike at an average premium of $0.46 apiece. The December $21 strike, which is currently the highest available strike price in the front month, generated volume of 3,485 calls in the first half of the session versus zero previously existing open interest at that strike. It looks like the majority of those call options were purchased by bullish players for an average premium of $0.32 a-pop. Call buyers at the December $21 strike make money if NUAN’s shares surge 18.8% over the current price of $17.95 to surpass the average breakeven point at $21.32 by expiration day next month. Rising demand for options on Nuance and takeover speculation lifted the stock’s overall reading of options implied volatility 10.9% to 44.05% by 11:30 am.

WAG – Walgreen Co. – A sizeable ratio call spread on Walgreen Co. may be the work of a contrarian trader anticipating a near-term rebound in the price of the underlying shares, which are currently down 2.55% to stand at $34.00 as of 11:30 am in New York. It looks like the investor picked up 7,500 calls at the December $35 strike at a premium of $0.50 each, and sold 15,000 calls up at the December $36 strike for a premium of $0.20 apiece. The trader paid a net premium of $0.10 per contract for the spread and stands ready to make money should WAG’s shares rally 3.2% over the current price of $34.00 to exceed the effective breakeven point at $35.10 by December expiration day. Maximum potential profits of $0.90 per contract are available to the investor should shares in Walgreen Co. surge 5.9% to settle at $36.00 at expiration. Selling twice as many calls at the December $36 strike substantially reduced the trader’s net cost of taking a bullish stance on the pharmacy operator. However, the ratio also exposes the investor to potentially devastating losses in the event that shares jump 8.5% to trade above the upper breakeven point of $36.90 ahead of expiration next month. Walgreen’s overall reading of options implied volatility is higher by 8.0% to arrive at 24.60% by 11:40 am.

IFF – International Flavors & Fragrances, Inc. – Shares of the manufacturer of flavor and fragrance products used in a variety of consumer goods slipped 0.90% to $51.51 in early-afternoon trading. The bearish move in the price of the underlying stock did not deter one strategist from placing a bullish bet on the stock with near-term put options. It looks like the investor sold more than 2,400 puts at the December $50 strike to pocket an average premium of $0.56 per contract. The trader keeps the full premium received on the transaction as long as shares in International Flavors & Fragrances exceed $50.00 through expiration day. The investor’s decision to sell the puts at the December $50 strike indicate optimism on IFF, but also suggests he is willing to have shares of the underlying stock put to him at an effective price of $49.44 should the puts land in-the-money at 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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