Option Activity Alert: AIG, CAT, DTV, WPI

AIG – American International Group, Inc. – The insurer’s shares rallied as much as 12.2% today to touch an intraday- and new 2-year high of $60.96 on news the firm secured $4.3 billion in bank credit lines. Mounting confidence in the insurance company along with the rising value of AIG shares inspired bullish options traders to purchase in- and out-of-the-money calls today. Weeklies were popular with options traders expecting to see shares end the year on a high note. Investors picked up more than 2,900 now in-the-money calls at the December ’31 $57.5 strike for an average premium of $0.93 each, and coveted upwards of 2,900 in-the-money call options at the higher December ’31 $60 strike at an average premium of $0.51 a-pop. Optimistic individuals also purchased some 1,300 call options at the December ’31 $65 strike for an average premium of $0.27 apiece. Options strategists looked to the January 2011 contract to place bullish bets, as well. Notable in-the-money call buying was observed here, as well as fresh interest in calls at the January 2011 $62.5 strike where more than 1,700 contracts were purchased for an average premium of $1.46 each. The sharp increase in demand for American International Group calls pushed the overall reading of options implied volatility on the stock higher by 25.2% to 50.30% in the final 15 minutes of the trading day.

CAT – Caterpillar, Inc. – It looks like some options investors expect the machinery maker’s shares to trend higher at the start of 2011. CAT-bulls are buying call options in the January 2011 contract this afternoon despite the 0.45% decline in the price of the underlying stock to $94.04. Options traders exchanged more than 7,200 calls at the January 2011 $95 strike by 3:10pm in New York trade. It looks like the majority, or approximately 5,300 of the call options, were purchased for an average premium of $1.58 a-pop. Call buyers make money if CAT’s shares rally more than 2.7% over the current price of $94.04 to first break above the current 52-week high of $94.89, and ultimately exceed the average breakeven point to the upside at $96.58 by January expiration day. Options implied volatility on the stock spiked 16.7% higher late in the session to arrive at 25.13% as of 3:15pm.

DTV – DIRECTV – Shares of the digital television entertainment company edged 0.20% lower in the final hour of the session to trade at $39.84. One options investor is positioning for shares in DTV to remain range-bound through expiration in January 2012. It looks like the trader initiated a short strangle, selling 5,000 calls at the January 2012 $45 strike for a premium of $1.90 each, and selling the same number of puts at the lower January 2012 $35 strike at a premium of $2.25 apiece. Gross premium pocketed on the strangle amounts to $4.15 per contract. The investor keeps the full amount of premium received on the transaction as long as shares in DTV trade within the boundaries of the strike prices described through expiration day in just over one year’s times. The strangle-seller may take profits off the table by buying back the position at some future date ahead of expiration. The long-dated contracts have a great deal of time value priced into the premium received by the investor today. The cost of buying back the strangle will fall as time erodes, and the trader may be able to close out the position profitably before the contracts expire in 2012. The short stance in both call and put options could result in losses to the investor, however, if DTV’s shares rally above the upper breakeven price of $49.15, or if shares slip beneath the lower breakeven point at $30.85 ahead of expiration.

WPI – Watson Pharmaceuticals, Inc. – The manufacturer of generic and brand name pharmaceutical products received near-term bullish bets by options strategists positioning for the price of the underlying to appreciate ahead of January 2011 expiration. Shares in Watson Pharmaceuticals are currently up 0.50% to stand at $51.93 as of 1:25pm. Last week, Watson said it received FDA approval for its low dose, chewable oral contraceptive drug. Investors expecting shares in Watson to edge higher purchased more than 1,500 in-the-money calls at the January 2011 $50 strike for an average premium of $2.25 a-pop. Call buyers at this strike make money if Watson’s shares rally to a new 52-week high of $52.25 ahead of expiration day. Bulls also purchased some 1,490 calls at the higher January 2011 $55 strike for an average premium of $0.25 each. Investors holding these contracts stand ready to accrue profits should shares in the pharmaceuticals firm surge 6.4% over the current price of $51.93 to surpass the effective breakeven price of $55.25 by January expiration. The rise in demand for Watson’s call options helped lift the stock’s overall reading of options implied volatility 11.8% to 22.81% by 1:30pm.

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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