Option Activity Alert: PCX, RSH, SA, EK

PCX – Patriot Coal Corp. – Options traders are placing bullish and bearish bets on the coal company today with roughly one week remaining before the firm reports fourth-quarter earnings ahead of the opening bell next Tuesday. Shares in Patriot Coal are up 3.8% at $24.05 as of 12:10pm in New York. One bullish player hoping to see PCX shares gravitate toward the January 14, 2011, 52-week high of $27.35, initiated a near-term call spread. The investor picked up approximately 4,700 now in-the-money calls at the February $24 strike for an average premium of $1.58 each, and sold about the same number of calls at the higher February $27 strike at an average premium of $0.67 apiece. Net premium paid to establish the bullish spread amounts to $0.91 per contract. Thus, the trader starts to make money if Patriot’s shares rally another 3.6% over the current price of $24.05 to surpass the average breakeven price of $24.91 by February expiration. Maximum potential profits of $2.09 per contract are available to the investor should shares in PCX jump 12.3% to trade above $27.00 by expiration day next month. Out-of-the-money put options in the front month were also popular with Patriot players in the first half of the session. One options strategist with a more pessimistic view enacted a ratio put spread on the stock ahead of the earnings report. The trader purchased around 1,100 puts at the February $22 strike at an average premium of $1.21 each, and sold 2,200 puts at the lower February $20 strike for an average premium of $0.56 a-pop. The net cost of the ratio spread amounts to just $0.09 per contract. The investor responsible for the spread profits if PCX shares decline 8.9% to slip beneath the average breakeven price of $21.91, and may make up to $1.91 per contract should shares plunge 16.8% to settle at $20.00 at expiration day. The sale of twice as many lower-strike puts exposes the put player to losses in the event that Patriot Coal’s shares drop 24.8% to trade below the lower breakeven price of $18.09 before the contracts expire in February.

RSH – RadioShack Corp. – News that the CEO of consumer-electronics retailer RadioShack will retire in May and weaker-than-expected fourth-quarter earnings guidance weighed heavily on shares in the name today. RSH shares fell as much as 13.06% to touch down at an intraday- and new 52-week low of $15.31. The firm said it expects to earn between $0.50 and $0.54 a share in the fourth quarter, which is much lower than the $0.66 per share analysts are expecting the firm to earn in the same time period. Not all investors seen perusing options on RadioShack are taking bearish positions on the stock. Mixed sentiment is apparent in near-term as well as longer-dated contracts. Put options expiring next month are popular, with more than 3,129 contracts having changed hands at the February $15 strike on open interest of just 96 lots. Investors are buying and selling these options for an average premium of $0.34 per contract. Put buyers are perhaps expecting RSH to extend losses in the near-term, while put sellers are happy to pocket premium while playing out a more optimistic view on the electronics retailer. More than 1,500 now in-the-money puts traded at the higher February $16 strike for an average premium of $0.72 apiece on previously existing open interest of 432 contracts. Volume in RSH options is heaviest out at the April $17 strike where 3,170 calls changed hands on paltry open interest of just 129 contracts. It looks like the vast majority of these calls were purchased for an average premium of $0.64 each by bulls positioning for a rebound in the price of RSH shares by expiration in a few months time. Call buyers are poised to profit should shares in RadioShack jump 12.2% over the current price of $15.72 to exceed the average breakeven point on the upside at $17.64 by April expiration. Options implied volatility is up 15.3% to arrive at 37.82% just before 1:00pm in New York. RadioShack reports fourth-quarter earnings after the market closes on February 22, 2011.

EK – Eastman Kodak Co. – Call options on Kodak are active today ahead of the firm’s fourth-quarter earnings announcement, scheduled for release ahead of the open on Wednesday morning. Shares in EK are up 1.35% to stand at $5.22 as of 1:15pm in New York. Demand for near-term calls in the name jumped during Friday’s trading session and continued to play out this morning. It looks like the majority of the 12,110 lots of open interest at the February $5.0 strike were purchased on Friday for an average premium of $0.55 apiece. Investors populating the front month today picked up more than 1,500 of the in-the-money call options at an average premium of $0.53 each. Call buyers are poised to profit should Kodak’s shares rally another 5.9% over the current price of $5.22 to surpass the average breakeven price of $5.53 ahead of expiration day in February. Approximately 1,600 calls changed hands up at the February $6.0 strike, but it appears the majority of these contracts sold for an average premium of $0.14 each. Open interest at that strike is more than sufficient to cover volume generated during the present session. The overall reading of options implied volatility on Eastman Kodak is lower by 10.8% this afternoon to stand at 68.33%.

SA – Seabridge Gold, Inc. – The firm engaged in the acquisition and exploration of gold properties in North America popped up on our ‘hot by options volume’ market scanner within the first 10 minutes of the trading week after one options trader picked up a debit call spread in the May contract. Shares in Seabridge are up 1.00% at $28.08 in early afternoon trade, but it looks as though the call-spreader is positioning for the price of the underlying stock to return to heights not seen since June of 2010. The investor picked up 3,000 calls at the May $30 strike for a premium of $2.45 each, and sold the same number of calls at the higher May $35 strike at a premium of $1.00 apiece. The net cost of the transaction amounts to $1.45 per contract and prepares the options player to make money if Seabridge’s shares surge 12.0% to surpass the effective breakeven share price of $31.45 by May expiration day. Maximum potential profits of $3.55 per contract are available to the trader should shares in the name jump 24.6% to exceed $35.00 before the options expire. Open interest in the higher-strike calls is sufficient to cover volume generated in the call spread, but upon closer examination, does not appear to be related to today’s transaction. Shares in Seabridge Gold last touched $35.00 back on June 28, 2010, and secured its 52-week high of $37.95 back on May 12, 2010.

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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