Option Activity Alert: AMR, OLN, VRGY, NANO

AMR – AMR Corp. – Investors expecting shares of the operator of American Airlines to fly higher ahead of August expiration appear to be selling out-of-the-money call and put options in order to finance the purchase of in-the-money call options. Shares in AMR Corp. are up 0.80% this morning to stand at $8.63 as of 11:20am in New York. A large portion of total volume in August contract call and put options was generated by one strategist placing a three-legged bullish ratio spread on the airline operator. It looks like the investor picked up 7,000 in-the-money calls at the August $8.0 strike for a premium of $1.78 each, sold 14,000 calls at the higher August $12 strike at a premium of $0.42 per contract, and sold 14,000 puts down at the August $6.0 strike for premium of $0.32 apiece. The net cost of the transaction amounts to just $0.30 per contract, and positions the investor to make money above an effective breakeven share price of $8.30 through expiration day. Maximum potential profits of $3.70 per contract are available to the trader should shares in AMR Corp. jump 39% over the current price of $8.63 to settle at $12.00 at expiration in August. The sale of twice as many calls and twice as many puts significantly reduces the cost of putting on the directional play, but is not without certain risks. The trader faces potentially devastating losses to the upside if AMR’s shares rally harder than he expects before the contracts expire. Losses start to accumulate in the event that shares increase 81.9% in the next seven months to surpass the upper breakeven price of $15.70. Furthermore, the sale of twice as many puts implies the investor could have shares of the underlying stock put to him at $6.00 apiece if the stock loses altitude and the puts land in-the-money at expiration. AMR Corp. is scheduled to report fourth-quarter earnings before the market opens on Wednesday of next week.

OLN – Olin Corp. – The commodity chemicals company popped up on our ‘hot by options volume’ market scanner within the first hour of the trading session after one investor initiated a delta neutral combination spread involving Olin stock and near-term call options. Shares in Olin Corp. are currently up 1.20% to stand at $20.50 as of 12:05pm in New York. It looks like the investor is prepared to benefit from upward or downward movement in the price of Olin’s shares through January expiration. The trader sold 325,000 shares of the underlying stock at $20.27 each, and purchased 5,000 in-the-money calls at the January $20 strike for a premium of $0.50 apiece on a 0.65 delta. The profit and loss profile on the transaction is such that the investor will benefit from share price erosion on the short stance in OLN shares. Meanwhile, the value of the long calls will grow significantly, trumping losses on the short stock position, as long as the price of the underlying continues to rise before the contracts expire next week. Delta on the call options has edged up to 0.85 as of 12:15pm from the 0.65 delta at which the transaction was initiated this morning. The January contract calls expire well in advance of Olin Corp.’s fourth-quarter earnings report after the close of trading on January 31, 2011.

VRGY – Verigy, Ltd. – One options strategist has had a change of heart regarding the likelihood that Verigy’s shares will rise in any meaningful way in the final week remaining before January expiration. Shares of the manufacturer of advanced test systems and solutions for the semiconductor industry slipped 0.90% in early afternoon trade to $13.15 as of 12:30pm. It looks like the formerly bullish player has thrown in the towel on a large debit call spread, unraveling the position today to take in the premium still left on the table. The trader originally accumulated a 13,000-lot January $13/$14 strike call spread at an average net cost of $0.61 per contract between December 30, 2010, and January 3, 2011. Shares in Verigy were trending higher at the end of last year on reports the firm received a sweetened $15.00 per share takeover bid by rival chip-tester, Advantest. Verigy’s shares jumped up to $13.75 on the takeover scenario, but have since pulled back somewhat. Analysts at Citigroup upped their share price target on VRGY yesterday on a more positive view a deal will take place and maintained a ‘hold’ rating on the stock. But, it seems perhaps that the dwindling amount of time remaining before the near-term calls expire spurred the investor to take down the trade today. The investor sold the spread this morning for an average net premium of $0.25 per contract, thus absorbing a net loss of $0.36 per contract on the closing sale. The overall reading of options implied volatility on the stock fell 8.2% to 51.61% by 12:50pm.

NANO – Nanometrics, Inc. – Shares of the supplier of advanced process control metrology systems used in the manufacturing of semiconductors rallied as much as 27.65% this morning to hit an intraday- and new 6-year high of $17.17 following Intel’s better-than-expected earnings report last night. NANO’s shares as well as shares in other chip equipment makers were lifted after Intel projected it will hike capital spending by 73% this year to $9 billion. The huge jump in shares of Nanometrics inspired demand for in- and out-of-the-money calls on the stock. Bullish players scooped up more than 1,225 now in-the-money call options at the January $16 strike for an average premium of $0.39 apiece. Call buyers at this strike start to make money if NANO’s shares exceed the average breakeven price of $16.39 through expiration next week. More than 1,770 calls have changed hands at the January $16 strike in the first half of the session on zero previously existing open positions. Nanometrics will report fourth-quarter earnings after the closing bell on February 10, 2011.

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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