Option Activity Alert: LO, HMA, AMR, USO

LO – Lorillard Inc. – A three-legged spread involving April contract put options on the cigarette manufacturer appears to be the work of an investor positioning for the price of the underlying stock to slip ahead of expiration. Shares in Lorillard, the maker of Newport cigarettes, the number one menthol brand, are currently up 0.33% to stand at $78.00 as of 12:50pm. The stock rallied as much as 5.7% one week ago to trade as high as $81.18 after the FDA said the risk of lung cancer for smokers of menthol cigarettes does not differ significantly from that of non-menthol cigarettes. But, last week’s sharp run up in LO’s shares was fairly short-lived given other portions of the FDA report that were not quite as positive for big tobacco. One trader expecting Lorillard’s shares to fall in the near-term seems to have established a bearish butterfly spread. The investor picked up 5,000 puts at the April $75 strike for a premium of $4.40 each, sold 10,000 puts at the April $65 strike for a premium of $1.50 apiece, and purchased 5,000 puts at the April $55 strike for a premium of $0.35 a-pop. Net premium paid to initiate the put ‘fly amounts to $1.75 per contract. The trader profits if LO’s shares decline 6.1% from the current price of $78.00 to breach the effective breakeven point at $73.25 by April expiration. Maximum potential profits of $8.25 per contract pad the investor’s wallet in the event that shares plummet 16.7% to settle at $65.00 at expiration. Options implied volatility on the cigarette-stock is up 3.4% at 54.92% just after 1:00pm in New York.

HMA – Health Management Associates, Inc. – Shares in the health care services provider are down 1.4% in early afternoon trade to stand at $10.01, but activity in August contract call options suggests one strategist is positioning for a rally in HMA’s future. The options player appears to have purchased a debit call spread, buying 1,300 calls at the August $11 strike for a premium of $0.75 each, and selling the same number of calls at the higher August $13 strike at a premium of $0.20 a-pop. The net cost of putting on the spread amounts to $0.55 per contract. Thus, the bullish trader is poised to profit in the event that the health care provider’s shares surge 15.4% over the current price of $10.01 to surpass the effective breakeven point on the spread at $11.55 by August expiration day. The investor could walk away with maximum potential profits of $1.45 per contract if shares in Health Management Associates jump 29.9% to trade above $13.00 ahead of expiration.

AMR – AMR Corp. – Call options on the operator of American Airlines are in high demand today with a number of investors positioning for shares in AMR Corp. to continue to rebound. Options traders are currently exchanging more than 3.3 calls on the stock for each single put option in action thus far in the session. Shares are currently up 0.65% to stand at $6.18 as of 12:30pm in New York. Call volume is heaviest at the April $7.0 strike where more than 26,000 lots changed hands on open interest of 14,111 contracts. It looks like the overwhelming majority of these calls, or at least 24,140 contracts, were purchased for an average premium of $0.26 apiece. Call buyers at this strike start making money in the event that AMR Corp.’s shares jump 17.5% to trade above the average breakeven price of $7.26 by expiration day next month. The overall reading of options implied volatility on AMR Corp. is up 9.7% to arrive at 65.49% this afternoon.

USO – United States Oil Fund LP – Shares in the USO are up at a new 52-week high this morning, but one big options player is positioning for the price of the underlying to pull back ahead of April expiration. It looks like the trader initiated a sizable ratio put spread to benefit from limited bearish movement in the fund’s shares. The USO’s shares increased as much as 1.1% at the start of the session to secure an intraday- and two-year high of $42.79. The contrarian player purchased 12,500 puts at the April $41 strike for a premium of $1.71 each, and sold 25,000 puts at the lower April $38 strike at a premium of $0.64 apiece. Net premium paid to establish the spread amounts to $0.43 per contract. The ratio spread positions the investor to make money should shares in the USO fall 5.2% from today’s high of $42.79 to breach the effective breakeven price of $40.57 ahead of April expiration day. Maximum potential profits of $2.57 per contract are available to the put player if the fund’s shares drop 11.2% to settle at $38.00 at expiration. The ratio of twice as many sold lower-strike puts suggests the investor foresees limited downside movement in USO shares. But, the parameters of the spread expose the trader to losses in the event that the price of the underlying fund declines 17.2% off today’s high to slip beneath the lower breakeven price of $35.43 within the time remaining to April expiration. Shares in the USO last dipped beneath $35.43 on February 16, 2011. More than 193,000 option contracts have changed hands on the USO as of 11:40am, with investors favoring calls over puts, trading roughly 1.5 call options on the fund for each single put option in play.

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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