Option Activity Alert: ITW, ACGL, DELL, HES

ITW – Illinois Tool Works, Inc. – Demand for out-of-the-money call options on the industrial products manufacturer jumped today after Illinois Tool Works was included in a list compiled by Reuters Insider of more than 80 companies that meet Warren Buffet’s criteria for an acquisition. Shares in the multinational manufacturer are up 1.1% at $54.16 in early-afternoon trade. Speculative call buying exploded at the May $57.5 strike where more than 7,160 calls changed hands on open interest of just 448 contracts. Investors purchased at least 5,380 of the calls for an average premium of $0.41 apiece. Call buyers profit if shares in Illinois Tool Works rally 6.9% over the current price of $54.16 to exceed the average breakeven point on the calls at $57.91 by May expiration day. Finally, all 214 of the call options exchanged at the higher May $60 strike were purchased at a premium of $0.15 each. The rise in demand for calls on ITW helped lift options implied volatility on the stock 5.7% to 21.56% by 1:00pm. Continued speculation that ITW may be the apple of Buffet’s eye, or rather, the elephant in the crosshairs, will likely send volatility higher along with the price in ITW shares. Premium on the calls will, in such a climate, continue to appreciate and may allow for short-term profit-taking in the absence of any significant revision to the current story. Of course, a far larger pot of gold awaits call buyers in the event of an ITW-acquisition ahead of May expiration. The calls will expire worthless, however, in the absence of any catalyst to drive the stock up over $57.50. Illinois Tool Works also has earnings on the horizon, reporting first-quarter results before the opening bell on April 26.

ACGL – Arch Capital Group, Ltd. – Shares in Arch Capital Group, an insurance and reinsurance underwriting company, increased as much 1.7% this morning to secure an intraday and new all-time high of $99.55. The stock popped up on our scanners at the start of the session due to heavier than usual trading traffic in its call options. It looks like one strategist is rolling a long call position up to a higher strike price in the April contract, booking profits on the one hand, and extending bullish sentiment on Arch Capital Group on the other. The investor appears to have originally purchased 500 calls at the April $90 strike at a premium of $2.00 each back on March 16, 2011, when shares in ACGL were hovering around $90.04. The sharp 10.5% rally in the price of the underlying since the initial transaction pumped up premium on the contracts, allowing the trader to sell all 500 deep in-the-money calls for a hefty premium of $9.10 each today. Net profits on that leg of the trade amount to $7.10 per contract. Next, the investor purchased a fresh batch of 500 in-the-money calls at the April $95 strike for a premium of $4.45 apiece. The bullish player starts making money on the new position in the event that Arch Capital Group’s shares exceed the effective breakeven price of $99.45 at expiration next month. The April contract calls expire before ACGL reports first-quarter earnings ahead of the opening bell on April 25, 2011.

DELL – Dell, Inc. – A three-legged bearish play pushed the PC maker onto our ‘most active by options volume’ market scanner today. It looks like one strategist is selling call options to partially finance the purchase of a bear put spread to position for a further pull back in the price of the underlying in the next couple of months. Dell’s shares are currently down 1.15% to stand at $14.47 just before 12:30pm in New York. Put buying was observed on Wednesday, as well. The stock was cut to ‘Hold’ from ‘Buy’ at Needham yesterday. The bearish player populating Dell options this morning appears to have sold roughly 5,000 calls at the May $16 strike at an average premium of $0.16 each, purchased around 5,000 puts at the May $14 strike for an average premium of $0.47 apiece, and sold some 5,000 puts at the lower May $12 strike at an average premium of $0.08 a-pop. Net premium paid to initiate the three-way spread amounts to $0.23 per contract. The investor responsible for the transaction starts making money if DELL’s shares fall another 4.8% from the current price of $14.47 to breach the average breakeven point on the downside at $13.77. Maximum potential profits of $1.77 per contract are available to the bearish player should shares in the computer manufacturer plunge 17.0% to trade below $12.00 at expiration in May. Dell, Inc. is scheduled to report first-quarter earnings after the closing bell on May 17, 2011, just a few days before the May-contract call and put options expire.

HES – Hess Corp. – The energy company’s shares rallied 2.6% in the first half of the session to as high as $86.00 after analysts at Credit Suisse upped their target price on neutral-rated Hess Corp. shares to $105.00 from $95.00. Bullish trading in the oil and natural gas producer’s options followed, with the majority of trading traffic centered in May contract calls. It looks like the majority of the calls are tied up in the purchase of the May $90/$95 call spread, wherein traders paid an average net premium of $1.19 per contract to position for the stock to rise sharply ahead of May expiration. Roughly 2,100 calls changed hands at the May $90 strike, while some 1,800 contracts traded at the higher May $95 strike. Investors employing debit call spreads stand prepared to profit should Hess Corp.’s shares surge 6.0% over today’s high of $86.00 to surpass the average breakeven price of $91.19 by expiration day. Maximum potential profits of $3.81 per contract, on average, are available to call-spreaders should shares jump 10.5% to trade above $95.00 at expiration in May. Hess Corp. reports first-quarter earnings before the market opens on April 27, 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.

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