CBST – Cubist Pharmaceuticals, Inc. – A three-legged transaction involving Cubist Pharmaceuticals stock, as well as call and put options, appears to be the work of a bearish investor positioning for shares in the name to pullback ahead of August expiration. CBST shares are currently down 1.05% to arrive at $22.15 as of 11:55am in New York. It looks like the strategist initiated a delta neutral position, selling around 88,600 shares at $22.24 each, selling 2,100 calls at the August $30 strike for a premium of $0.80 per contract, and buying 2,100 puts at the August $17 strike at a premium of $1.45 apiece, on a delta of approximately 0.42. The parameters of the transaction prepare the trader to potentially amass substantial profits if shares in the biopharmaceutical company continue to trend lower in the time remaining to expiration. The value of the long put options will rise as shares fall, while the short calls will decline in value and become cheaper to buy back. Erosion in the price of the underlying shares is also favorable on the short stock leg of the transaction.
STJ – St. Jude Medical, Inc. – The medical devices manufacturer popped up on our scanners in early morning trade after a large number of call and put options changed hands in the January 2012 contract. It looks like one investor initiated a sizeable bullish stance on the stock in order to position for shares in St. Jude Medical to rise substantially by January of next year. Shares in the name increased as much as 2.2% today to secure an intraday- and new 52-week high of $44.95 in the first half of the session. The trader appears to have sold 5,900 puts at the January 2012 $40 strike for a premium of $2.25 each in order to buy the same number of calls up at the January 2012 $50 strike at a premium of $2.25 apiece. The sale of the puts exactly offsets the cost of buying the calls. Thus, the options player is prepared to make money should shares in STJ surge 11.2% over today’s high of $44.95 to exceed the effective breakeven price of $50.00 by expiration day next year. The sale of the puts indicates the investor is obliged to have 600,000 shares of the underlying stock put to him at $40.00 each in the event that the puts land in-the-money at expiration.
EFA – iShares MSCI EAFE Index Fund – Shares of the EFA rallied as much as 0.67% during the first half of the trading session to touch an intraday- and new 52-week high of $61.39, but it looks like one options strategist is betting that what goes up, must eventually come down. The investor appears to have initiated a ratio put spread on the EFA, an exchange-traded fund developed as an equity benchmark for international stock performance, buying 20,000 puts at the March $60 strike for a premium of $1.06 each, and selling 40,000 puts at the lower March $57 strike for a premium of $0.47 apiece. The net cost of the transaction amounts to $0.12 per contract, thus positioning the investor to profit if shares in the fund drop 2.5% from today’s high of $61.39 to slip beneath the effective breakeven price of $59.88 ahead of March expiration. Maximum potential profits of $2.88 per contract are available to the trader should shares in the EFA fall 7.2% to settle at $57.00 at expiration next month. The ratio of twice as many short puts suggests that, while the trader expects the price of the underlying to pull back somewhat, he does not foresee an all out collapse in the ETF’s share price in the near future. The ratio-nature of the spread exposes the investor to losses in the event that shares plunge 11.8% off the new high of $61.39 to breach the lower breakeven price of $54.12.
PEP – PepsiCo, Inc. – Bullish options traders are gorging on PepsiCo call options this morning ahead of the firm’s fourth-quarter earnings report that’s scheduled for release before the market opens on Thursday. Shares in the food, beverage and snack-making giant are up more than 0.60% to stand at $64.08 as of 11:15am in New York. Investors positioning for shares in PepsiCo to extend gains in the near-term picked up more than 4,400 calls at the February $65 strike for an average premium of $0.39 apiece. Call buyers are poised to profit should shares rally another 2.0% to surpass the average breakeven price of $65.39 by February expiration. Traders purchasing the calls today appear to be building up long call open interest at the February $65 strike. Open interest patterns suggest some 5,000 calls were picked up at that strike in the past few trading sessions for an average premium of $0.35 per contract. PepsiCo’s shares traded as high as $67.46 during 2011.