Option Activity Alert: KBH, BAC, LNG, ZION

KBH – KB Home – With markets in buoyant mood to start a New Year, investors continue to buy into the homebuilding sector. On Friday we noted bullish options activity on Toll Brothers and today with homebuilders up once more we’ve picked up on the rewards one investor is cashing in on in today’s activity on fellow sector member, KB Home. On September 17 we reported how an investor was loading up for a more-than 25% rise in shares at KB Home by using a January expiration call spread. At the time its share price stood at $11.35 while the investor bought $14 strike calls selling those at the $16 strike at the same time. In doing so the investor reduced the cost of placing a bullish bet from 50-cents to 35-cents. Fast-forward to today’s optimistic trading and shares in KB Home have rallied a further 5% today to stand at $14.25 allowing the investor to shed the now in-the-money $14 calls for 60-cents for a nice return 42% return. The investor isn’t yet out of the woods though and assumes the risk of a further rally in the stock to the $16 strike price where the short call position rests. In all likelihood those calls will expire worthless but the options market teaches us to never say never. The chances of these calls landing in-the-money within three weeks currently stand at one-in-five.

BAC – Bank of America Corp. – As ever, options activity in BoA is sky-high. Today there is at least some fundamental news to drive the frenzy. The nation’s largest bank by assets said its fourth quarter earnings would include a $2 billion impairment charge and a further provision of $3 billion following a settlement on its dispute over allegedly selling loans to Fannie and Freddie, the two behemoths acting as government sponsored entities in the nation’s mortgage market. Shares in the lender rose around 5% to $14.00. Options activity in the January 2012 contract exhibited a little more confidence in prospects for BoA having agreed to settle by paying Freddie and Fannie $2.6 billion. Investors appear to have sold at least 1600 put options at 36 cents using the $7.50 strike while also promising to buy stock at $10.00 should shares close below that point in one year’s time. The premium charged for that privilege today was 75 cents. There was still, however, demand for protection against a further lurch lower with investors paying $1.49 per contract at the same expiration $12.50 strike. Implied volatility on the stock headed marginally lower to 34.5%.

LNG – Cheniere Energy Inc. – Liquefied natural gas terminal developer and exploration company, Cheniere Energy has rallied sharply following a long-shot bullish play using call options on the stock. One player scooped up 10,000 call options at the $9.00 strike, which itself is 25% above the 52-week high established on November 22 at $7.22. With the stock trading at $5.80 on Monday, an options play struck and paid 25-cents to open a bullish play on the stock. It appears that the activity shook energy sector watchers who were quick to pounce on shares in Cheniere lifting them further to a session high at $6.44. We don’t see much news behind today’s gain, which has so far left the company better-capitalized by 15%.

ZION – Zions Bancorp. – With financial issues helping propel indices to new highs today, shares of Zions Bancorp are trading at the highest since May 27, and have so far recorded a 3.4% gain to $25.05. One options player appears to be planning for continued acceleration or could be trying to play it safe against a recoil. We can see that both January calls at the $26.00 strike and puts at the $25.00 strike traded in identical size, but as both traded between the bid and ask, it’s hard to nail down the trade. In addition we don’t know whether the investor has an existing holding in the stock. What seems likely is that the at-the-money puts were bought at a 74-cent premium while the higher strike calls were sold at 36-cents in order to defend a profitable position in the underlying stock. Such a strategy is known as a collar combination and allows the investor to lock-in to gains by employing a lower-cost put nearer to-the-money, while using the less expensive call option for two purposes. First, it offsets the cost of the protective put leg of the trade, while second provides a convenient exit at expiration should shares continue to rally to the strike. In this case, the share price would need to keep rallying by a further 4% over the next three weeks to entice the holder to give away his holding. The investor may well be enticed to do this as the stock traded beneath $19.00 as recently as the end of November and has rallied 24.6% in December.

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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