Option Activity Alert: BCSI, BHP, KFT, MOBI

BCSI – Blue Coat Systems, Inc. – Speculation and unconfirmed rumors that Cisco may be interested in acquiring rival Blue Coat Systems sent shares in Sunnyvale, CA-based Blue Coat up as much as 8.0% this afternoon to an intraday high of $28.85. Investors flocked to the May contract to buy out-of-the-money call options on the stock in case the there’s any element of truth driving the takeover chatter, or simply to benefit from rising call premiums that result from the higher implied volatility and share price that’s likely to accompany continued speculation. Options traders exchanged more than 4,500 calls at the May $29 strike on open previously existing open interest of just 150 contracts. It looks like bulls purchased the majority of the calls for an average premium of $0.71 apiece. Call buyers stand prepared to profit in the event that Blue Coat’s shares rally another 3.0% to surpass the average breakeven price on the upside at $29.71 by May expiration. Investors purchased another 1,000 call options up at the May $30 strike, paying an average premium of $0.57 a-pop. Higher-strike call buyers make money if shares in Blue Coat Systems increase 6.0% over today’s high of $28.85 to exceed the average breakeven share price of $30.57 in the time remaining to expiration. Options implied volatility on the stock jumped 21.8% to 50.04% on Friday afternoon, and continues to climb in the final hours of the trading week.

BHP – BHP Billiton Limited – Put players initiated diverse bearish options strategies on the natural resources company today, with shares in BHP Billiton slipping 0.65% to $99.79 on speculation China may do more to combat the faster-than-expected rise in inflation. The bulk of volume generated in BHP’s options appears to be the work of one investor rolling a long 10,000-lot put stance up from the May $85 strike to the May $90 strike. The alteration in the position yields more effective downside protection, assuming the trader is long the underlying stock, in that protection kicks in on the May $90 strike puts if BHP’s shares drop roughly 10.0% by May expiration, while protection from the initial long stance at the May $85 strike dictates a 15.0% slump in shares. Another strategist found a creative way of slashing the price tag on positioning for a pullback in BHP Billiton’s shares by expiration day next month. The investor established a ratio put spread, buying 2,000 puts at the May $90 strike for a premium of $0.72 each, and selling 4,000 puts at the lower May $85 strike at a premium of $0.325 apiece. Net premium paid to initiate the ratio spread amounts to $0.07 per contract, and positions the investor to make money should shares in the natural resources company plunge 9.9% from the current price of $99.79 to breach the effective breakeven point on the spread at $89.93 by expiration day in May. Maximum potential profits of $4.93 per contract pad the investor’s wallet in the event that shares in BHP fall 14.8% to settle at $85.00 at expiration. The ratio of twice as many short puts exposes the trader to losses if the price of the stock drops like a rock in the near term. But, premium received on the trade protects the player from losses all the way down to a lower breakeven share price of $80.07.

KFT – Kraft Foods, Inc. – Call options on the world’s second-largest food maker are popular today with shares in Kraft Foods rising as much as 1.80% to an intraday- and new 2-year high of $33.54. Consumer staple stocks were some of the best performers in the S&P 500 this week as rising commodity prices and inflation worries overseas prod investors to rotate to more defensive names. Options traders expecting the market to favor consumer staples in the medium- and long- term looked to Kraft call options in the June and January 2012 contracts. Bullish players purchased around 6,200 calls at the June $34 strike for an average premium of $0.49 apiece. Call buyers at this strike make money if shares in Kraft Foods rally another 2.8% over today’s high of $33.54 to surpass the average breakeven price of $34.49 by expiration day in June. Longer-term optimists picked up at least 1,000 calls out at the January 2012 $35 strike for an average premium of $0.89 each. Investors purchasing the longer-dated call options face an average breakeven share price of $35.89. Kraft Foods is scheduled to report first-quarter earnings after the final bell on May 5, 2011.

MOBI – Sky-mobi, Ltd. – A sharp rally in the price of Sky-mobi’s shares arrived just in time for buyers of April contract calls to see the value of their positions sky-rocket ahead of expiration. Shares in the provider of mobile application technology in China jumped 12.1% this morning to secure an intraday- and new all-time high of $16.37. The stock has come up 211.2% since the first trading day of 2011. Bullish players purchased deep out-of-the-money call options on MOBI this week. It looks like traders purchased roughly 500 April $15 strike calls on Wednesday for an average premium of $0.18 per contract, with shares in Sky-mobi hovering around $12.81. The surge in the price of the underlying stock today saw the April $15 strike calls command an asking price as high as $1.21 per contract, which is more than six times as expensive as the options were just a couple of days ago. MOBI’s shares are currently up a lesser 8.3% at $15.81 as of 12:10pm in New York, but buyers of the calls still hold options that are far more valuable than they were on Wednesday. It looks like some buyers of the now in-the-money April $15 strike calls initiating their positions today were able to pay $0.45 per contract within the first 5 minutes of the opening bell. Even traders who arrived late to the party are sitting pretty, with the intrinsic value of the nearly-expired calls well above $0.45 in early-afternoon trade.

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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