Option Activity Alert: LULU, EK, CNO, SFD

LULU – Lululemon Athletica, Inc. – Christmas arrived early for investors in Lululemon Athletica with the athletic apparel maker’s shares rallying more than 19.65% today to a new all-time high of $66.66. LULU’s shares jumped after the Canadian company reported third-quarter earnings that shattered Street estimates. The designer of high-quality yoga apparel and accessories earned $0.36 a share in the quarter, which easily blew the lid off average analyst estimates of $0.25 a share. Lululemon said it expects to earn between $0.46 and $0.48 a share on revenue of $210 to $215 million in the fourth quarter. Investors were chomping at the bit before the opening bell to get in on the action and commenced call buying right out of the gate this morning. It looks like bulls bought more than 1,400 now in-the-money calls at the December $60 strike for an average premium of $4.19 each, and purchased another 1,100 in-the-money calls at the higher December $65 strike at an average premium of $1.51 apiece. Approximately 1,000 calls were picked up at the December $70 strike, the highest available strike price in the front month, for an average premium of $0.32 per contract. Call buyers gravitated to the longer-term January 2011 contract, as well. Investors appear to have purchased the majority of the more than 3,670 calls exchanged at the January 2011 $70 strike for an average premium of $1.61. LULU’s overall reading of options implied volatility fell more than 21% at the start of the trading session to 40.25%, but is currently down a lesser 11% on the day to stand at 45.36% just before 1:00 pm in New York.

EK – Eastman Kodak Co. – Call options on Eastman Kodak are in high demand today with shares of the imaging products and services firm rising as much as 13.6% this morning to an intraday high of $5.42. Options traders hoping the current rally is one of many bullish Kodak moments to come scooped up in- and out-of-the-money calls in the December and January 2011 contracts. Investors purchased at least 1,900 in-the-money calls at the December $5.0 strike for an average premium of $0.30 apiece, and picked up another 1,500 contracts at the higher December $5.5 strike at an average premium of $0.14 each. Bullish sentiment spread to the January 2011 $5.0 strike where some 2,500 in-the-money calls were coveted at an average premium of $0.63 a-pop. Trading traffic is heaviest at the higher January 2011 $6.0 strike where more than 7,350 call options changed hands as of 12:15 pm. At least 3,800 of these call options appear to have been purchased for an average premium of $0.25 per contract. Call buyers at this strike are poised to profit should Kodak’s shares jump 15.3% over today’s high of $5.42 to surpass the average breakeven price of $6.25 by January 2011 expiration day. The sharp rise in demand for call options on EK and the substantial shift in the price of the underlying helped lift the overall reading of options implied volatility on the photo-firm 38.1% to 77.50% in early afternoon trade.

CNO – CNO Financial Group, Inc. – Shares of the insurer are currently up 6.05% to trade at a new 52-week high of $6.82 as of 11:25 am in New York trading. One options strategist is positioning for the price of the underlying stock to continue to climb in 2011. It looks like the investor initiated a calendar spread, buying 6,745 in-the-money calls at the January 2011 $6.0 strike for a premium of $0.70 each, and selling the same number of longer-dated calls at the January 2012 $7.5 strike at a premium of $0.77 apiece. The trader pockets a net credit of $0.07 per contract on the spread. The investor may decide to exercise his right to purchase some 674,500 shares of the underlying stock at an effective price of $5.93 a share by January 2011 expiration. The spread would then mimic that of a covered call strategy. The short position in January 2012 $7.5 strike calls serve as an exit strategy on the position in the underlying, dictating maximum potential gains of 26.475% if shares rally up from an effective purchase price of $5.93 a share to $7.50, as long as the longer-dated contracts land in-the-money ahead of expiration day in more than one year. Of course, it is also possible the investor responsible for the spread has different plans in mind to perhaps unravel or adjust his position in CNO call options going forward. Options implied volatility on CNO Financial Group is lower by 5.2% to stand at 37.32% this morning.

SFD – Smithfield Foods, Inc. – The hog producer and pork processing firm popped up on our scanners this morning due to activity in January 2011 contract call options. Smithfield’s shares surged 10.8% during the session to hit an intraday high of $19.61 after the firm swung to a second-quarter profit of $0.86 a share, versus a net loss of $0.17 a share in the same period last year. Investors itching for continued bullish movement in the price of Smithfield’s shares looked to the January 2011 $20 strike to pick up more than 3,000 calls for an average premium of $0.59 per contract. Call buyers at this strike are prepared to make money should SFD’s shares rally another 5.00% over today’s high of $19.61 to exceed the average breakeven price of $20.59 ahead of expiration day next month. Open interest at the January 2011 $20 strike is sufficient to cover volume in calls traded during the current session many times over. But, it looks like call buyers today are building upon long call positions at that strike. Back on November 18, 2010, it seems approximately 19,000 calls were purchased for an average premium of $0.45 each. Investors that bought the calls for a premium of $0.45 each in November are now holding calls worth roughly 31.1% more, on average.

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.

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