Option Activity Alert: FO, XLK, KFN, SLE

FO – Fortune Brands, Inc. – The holding company for firms engaged in the manufacture, production and sale of distilled spirits, home and hardware products and golf products popped up on our scanners in the first half of the trading session after one strategist initiated a sizeable stock and option combination play. Fortune Brands’ shares rallied as much as 2.10% to hit an intraday- and new 52-week high of $62.44 on news the firm’s Board of Directors approved in principle a plan that would ultimately result in the firm focusing exclusively on the distilled spirits business. The options trader populating Fortune Brands today appears to have purchased 500,000 shares of the underlying stock at a price of $61.30 as part of a buy-write or covered call strategy. The investor sold 5,000 in-the-money calls at the January 2011 $60 strike to receive premium of $3.10 apiece. Finally, the investor also purchased downside protection in the form of 5,000 puts at the lower January 2011 $55 strike at a premium of $0.65 a-pop. Buying up the put options cuts in to premium received on the sale of the calls, leaving the investor a net credit of $2.45 per contract. The rich premium pocketed by the investor effectively reduces the price paid to get long the stock from $61.30 to $58.85 a share. Thus, the buy-write strategist stands prepared to accumulate maximum potential gains of 1.95% if the shares are called away from him ahead of January expiration. The puts protect the value of the underlying in the event that shares in Fortune Brands slip lower by expiration day next month. But, if FO’s shares slide under $60.00 and the calls expire worthless at expiration, the investor may choose to hold onto the underlying position in order to capitalize on a potential rally that may be in store for FO in 2011.

XLK – SPDR Technology Select Sector ETF – Put options are popular on the tech-sector fund today, but it seems at least one of the traders involved in the activity is initiating a cautiously optimistic stance on the ETF. Shares of the XLK, an exchange-traded fund designed to replicate the price and yield performance of the Technology Select Sector of the S&P 500 Index, are up 0.30% to stand at $24.92 as of 1:00 pm in New York. The bullish player appears to have initiated a delta neutral hedge, buying 4,000 puts at the June 2011 $24 strike for a premium of $1.24 each on a 0.38 delta, against the purchase of 152,000 shares of the underlying fund for $24.93 a share. The long stance in XLK shares suggests this trader is bullish on the technology sector, while the purchase of the put options indicates he is willing to shell out extra premium for a safety net in case bullish predictions prove to be misguided ahead of June 2011 expiration.

KFN – KKR Financial Corp. – Shares of the specialty finance firm fell 4.2% this afternoon to $9.08, recovering somewhat from an earlier 7.4% decline to an intraday low of $8.78, precipitated by news the company plans to sell 18 million of its common shares in an underwritten public offering. The price of the underlying shares rallied to a new 52-week high of $9.50 yesterday. One contrarian options investor appears to be taking advantage of the pullback in KKR Financial Corp. shares today by initiating a long-term bullish stance on the stock. It looks like the trader established a bull call spread, buying approximately 1,500 in-the-money calls at the April 2011 $9.0 strike for an average premium of $0.76 each, and selling roughly the same number of calls at the higher April 2011 $10 strike at an average premium of $0.36 apiece. The average net cost of the transaction amounts to $0.40 per contract. Thus, the bullish player is prepared to make money should KFN shares rebound above the average breakeven price of $9.40 ahead of expiration day. Maximum potential profits of $0.60 per contract are available to the investor should shares in KKR Financial Corp. surge 10.1% over the current price of $9.08 to first break through the current 52-week high of $9.50, and ultimately exceed $10.00 ahead of April expiration day.

SLE – Sara Lee Corp. – The manufacturer of brand-name bakery, beverage and household consumer products popped up on our ‘hot by options volume’ market scanner today due to near-term bullish activity in December and January 2011 contract call options. Sara Lee’s shares increased as much as 2.2% earlier in the trading day to touch an intraday- and new 52-week high of $16.05. New highs for SLE shares proved to be short-lived, however, as the price of the underlying is currently lower by 0.05% on the day to stand at $15.70 as of 12:50 pm in New York. Nevertheless, investors hoping to see SLE extend gains picked up more than 1,650 calls at the December $16 strike for an average premium of $0.28 apiece. Call buyers are poised to profit should shares in Sara Lee rally another 1.4% over today’s high of $16.05 to surpass the average breakeven point to the upside at $16.28 ahead of December expiration day. Bullish sentiment spread to the January 2011 $16 strike where investors shelled out an average premium of $0.75 per contract to take ownership of more than 1,500 call options. Investors holding these contracts make money if SLE’s shares surge 6.7% over the current price of $15.70 to exceed the average breakeven point at $16.75 by January 2011 expiration. Finally, some 800 call options were scooped up at the higher January 2011 $17.5 strike for an average premium of $0.36 each. The sharp rise in demand for call options on Sara Lee Corp. today helped lift the stock’s overall reading of options implied volatility 28.2% to 33.44% before 1:00 pm.

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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