Option Activity Alert: MJN, ETFC, GNK, CAT

MJN – Mead Johnson Nutrition Co. – The global provider of pediatric nutrition popped up on our scanners after long-dated call and put options changed hands in the January 2012 contract. Shares in Mead Johnson are down slightly by 0.40% as of 12:30pm to stand at $59.78. The Glenview, IL-based firm reported fourth-quarter earnings of $0.57 a share before the market opened, beating the average forecast by one penny, but revenues for the quarter came in at $803.7 million, which missed estimates of $808.0 million. It looks like one investor is positioning for Mead Johnson’s shares to increase substantially ahead of January 2012 expiration. The investor appears to have sold 1,900 puts at the January 2012 $50 strike at a premium of $2.68 each, in order to buy the same number of call options at the higher January 2012 $65 strike for a premium of $3.58 apiece. The net cost of the bullish risk reversal amounts to $0.90 per contract. Thus, the investor stands ready to make money should shares in MJN rally 10.2% over the current price of $59.78 to exceed the effective breakeven price of $65.90 by expiration day in one year’s time. Options implied volatility on the stock is down 16.4% at 26.00% in early afternoon trade.

ETFC – E*Trade Financial Corp. – Shares in the provider of online brokerage and other financial services rallied as much as 6.7% this morning to secure an intraday high of $16.85 despite a weaker-than-expected earnings report Wednesday evening. Analysts, on average, were expecting ETFC to earn $0.04 a share, but the fourth-largest U.S. retail brokerage said it lost $0.11 a share in the fourth quarter. The earnings miss has not stymied today’s rally in the price of the underlying shares, but traders are favoring put options on the stock this morning. It looks like one or more investors established debit put spreads in the April contract, buying roughly 2,000 puts at the April $16 strike for an average premium of $0.87 each, and selling some 2,000 puts at the lower April $14 strike at an average premium of $0.23 apiece. The average net cost of initiating the put spread amounts to $0.64 per contract. Investors profit on the position if shares in ETFC decline 8.8% off today’s high of $16.85 to slip beneath the average breakeven price of $15.36 by April expiration day. Maximum potential profits of $1.36 per contract are available should shares drop 16.9% to trade below $14.00 ahead of expiration in April. Put-spreaders may be utilizing the strategy to hedge a long position in the underlying rather than as a pure bearish bet on the stock. Shares in E*Trade increased roughly 37.5% in the past 6 months. The overall reading of options implied volatility on ETFC is down 28.0% at 27.38% post-earnings.

GNK – Genco Shipping & Trading, Ltd. – Bearish investors are loading up on Genco put options this morning with shares in the drybulk shipping company falling 4.6% in the first half of the session to an intraday- and 21-month low of $11.70. Shares were likely helped lower by a number of recent analyst revisions. GNK was downgraded to ‘Market Perform’ from ‘Outperform’ at Wells Fargo Securities today, which follows a cut to ‘Hold’ from ‘Buy’ with a 12-month target share price of $12.00 at Deutsche Bank on Tuesday. Traders positioning for continued bearish movement in the price of the underlying stock through the next few months are generating substantial volume in out-of-the-money put options in the March and April contracts. More than 7,600 put options changed hands at the March $10 strike on paltry previously existing open interest of just 50 contracts. It looks like nearly all of the puts were purchased for an average premium of $0.25 apiece in the first 35 minutes of the session. Put buyers are poised to profit should shares in GNK plunge 16.7% off today’s low of $11.70 to breach the effective breakeven point on the downside at $9.75 ahead of March expiration. Pessimism on the drybulk carrier spread to the April $10 strike where another 1,177 puts were picked up for a premium of $0.40 each. Bears also paid a premium of $0.25 per contract to buy approximately 2,500 put options at the lower April $9.0 strike. Investors holding the lower-strike put options make money if shares in Genco shipping sink 25.2% lower to slip beneath the breakeven share price of $8.75 by April expiration. Options implied volatility on stock is up 6.6% to stand at 49.30% as of 11:20am in New York trade.

CAT – Caterpillar, Inc. – Bulls are buying up call options on Caterpillar this morning after the world’s largest maker of construction equipment reported better-than-expected fourth-quarter profits of $1.47 a share, which handily surpassed the average analyst estimate of $1.28 per share. Shares increased as much as 2.1% during the trading session thus far to touch a new all-time high of $97.79. Investors hoping to see CAT extend gains in the next couple of months scooped up in- and out-of-the-money call options on the stock today. Near-term optimists purchased roughly 2,200 in-the-money calls at the February $95 strike for an average premium of $3.10 apiece. Call buying spread to the higher February $100 strike where more than 4,500 call options were picked up for an average premium of $0.96 each. Traders holding the higher-strike calls are prepared to make money should CAT’s shares rally another 3.2% over today’s high of $97.79 to surpass the average breakeven price of $100.96 by February expiration. Investors also purchased around 1,500 calls at the March $100 strike for an average premium of $1.95 a-pop. Longer-term optimists looked up to the May $110 strike to buy approximately 1,000 call options at an average premium of $1.11 per contract. Call buyers at this strike profit in the event that Caterpillar’s shares jump 13.6% to trade above the average breakeven point to the upside at $111.11 by the time the contracts expire in May. Options implied volatility on CAT is lower by 10.5% to stand at 23.49% following earnings.

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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