Option Activity Alert: PRU, WDC, HBI, ID

PRU – Prudential Financial, Inc. – Long-dated call options on Prudential Financial are active today following the purchase of butterfly spreads in the January 2012 contract. Shares in the Newark, NJ-based insurer rallied 2.75% today to secure an intraday high of $61.20. Analysts at Barclays Capital rated PRU new ‘overweight’ with a target share price of $77.00 earlier in the week. The bullish call ‘fly spreads involved the purchased of 3,817 calls at the January 2012 $65 strike, the sale of 7,634 calls at the January 2012 $72.5 strike, and the purchase of 3,817 calls up at the January 2012 $80 strike price. The average net cost of initiating the spread amounts to $1.29 per contract. The investor or investors responsible for the trade profit if Prudential’s shares surge 8.3% over today’s high of $61.20 to surpass the average breakeven price of $66.29 by expiration day in January. Maximum potential profits of $6.21 per contract are available on the butterfly spread should shares in PRU jump 18.5% in the next nine months to settle at $72.50 at expiration. Prudential Financial is scheduled to report first-quarter earnings after the final bell on May 4, 2011.

WDC – Western Digital, Inc – Options strategists targeted Western Digital today in advance of the company’s third-quarter earnings report. Shares in the computer hardware maker increased as much as 3.7% during the session to $40.98; the highest shares have been since May 2010. One optimistic player appears to have initiated a three-legged trade in the January 2012 contract to position for the price of the underlying stock to rise substantially by expiration next year. It looks like the investor sold deep out-of-the-money puts to partially finance the purchase of a bull call spread. The trader sold roughly 2,300 puts at the January 2012 $30 strike, purchased around the same number of January 2012 $45 strike calls, and sold roughly 2,300 calls up at the January 2012 $55 strike. Net premium paid for all three legs of the transaction amounts to an average of $2.11 per contract. The investor responsible for the trade is poised to profit should Western Digital’s shares surge 15.0% over today’s high of $40.98 to surpass the average breakeven price of $47.11 by expiration day in January. Maximum potential profits of $7.89 per contract are available to the options player in the event that WDC’s shares jump 34.2% to trade above $55.00 at expiration. Western Digital’s shares have not exceeded $50.00 since the late 1990s.

HBI – Hanesbrands, Inc. – Call buyers acting ahead of the apparel maker’s earnings report this morning saw the value of their options jump overnight, with shares in the Winston-Salem, NC-based company rallying as much as 11.5% to touch an intraday high of $32.49 at the start of the session. Shares in Hanesbrands currently stand 7.4% higher on the day at $31.29 as of 11:40am in New York. Yesterday, we noticed call buying in the front month, with roughly 2,000 calls purchased at the May $30 strike for an average premium of $0.78 per contract. The increase in open interest at that strike suggests investors held onto the calls overnight to position for a post-earnings rally, while current volume of 389 calls at the May $30 strike indicates call buyers have not yet taken profits on their positions. Hanesbrands said it earned $0.49 a share or $48.1 million in the quarter, a 32% increase in net income over the same period last year. The company raised full-year earnings and sales estimates to a range of $2.70 to $2.90 a share on revenue of $4.9 to $5.0 billion. Investors who purchased the now in-the-money May $30 strike calls at an average cost of $0.78 per contract on Tuesday, are today holding options that cost as much as $2.50 and as little as $1.65 apiece for any investors looking to buy the same contracts one day later. Options implied volatility on HBI plunged 34.9% post-earnings to stand at 25.37% as of 12:05pm in New York.

ID – L-1 Identity Solutions, Inc. – Stamford, CT-based L-1 Identity Solutions did not join in on the broad-market rally today, its shares instead slipped slightly by 0.10% to $11.75 by 1:20pm in New York. The provider of products and services that aim to secure personal identities and assets popped up on our ‘hot by options volume’ market scanner after one options player picked up a bear put spread in the June contract. L-1 Identity Solutions is slated to report first-quarter earnings after the close on May 5, 2011. The pessimistic player purchased 2,500 puts at the June $11 strike for an average premium of $0.20 each, and sold the same number of puts at the lower June $10 strike at an average premium of $0.10 apiece. The trader paid just $0.10 per contract for the spread, which may represent an outright bearish bet on the stock, or cheap downside protection on a long position in the underlying stock. If the investor is speculating on a share price pullback, he starts to accumulate profits in the event that shares in ID drop 7.2% from the current price of $11.75 to breach the effective breakeven point on the downside at $10.90 by June expiration. Maximum potential profits of $0.90 per contract pad the investor’s wallet if shares plunge 14.9% in the next couple of months to trade below $10.00 at expiration in June. The increase in demand for put options on the stock, which currently has overall previously existing open interest of just 3,461 contracts, lifted options implied volatility on ID 7.6% to 7.83% in early afternoon trade. Shareholders in L-1 Identity Solutions approved a merger transaction with French defense company Safran SA and British defense company BAE Systems back in February. In mid-March, L-1 said the Committee on Foreign Investment in the United States (CFIUS) was investigating the sale of the company, and expected the deal to close 45 to 60 days later.

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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