Option Activity Alert: DELL, CAG, GPS, XLNX

DELL – Dell, Inc. – Strategists populating Dell options today are sending mixed signals on the PC maker ahead of the company’s first-quarter earnings report on May 17. Call buyers in the June contract appear to be gearing up for a rally in the price of the underlying shares, while ratio put spreaders are taking a more cautious stance on the stock. Shares in Dell are currently up 0.25% to stand at $15.84 as of 12:15pm. Options traders exchanged more than 9,800 calls at the June $16 strike on open interest of 3,774 contracts. It looks like nearly all of the contracts were purchased for an average premium of $0.63 a-pop. Investors long the calls profit if DELL’s shares rally 5.0% over the current price of $15.84 to exceed the average breakeven price of $16.63 by expiration day next month. Meanwhile, one or more put players initiated ratio spreads. Approximately 3,500 in-the-money puts at the June $16 strike were purchased for an average premium of $0.81 each, while 7,000 puts at the lower June $15 strike sold for an average premium of $0.37 apiece. Investors employing the spreads paid a net premium of $0.07 per contract, on average. The sale of twice as many of the lower-strike put options substantially reduced the cost of positioning for a pullback in Dell’s shares through expiration day next month. Traders may be using the put-play to hedge a long position in the stock, or may be positioning for shares to decline rather than rally as call buyers’ actions suggest. The parameters of the put spread, for outright bearish players, indicate maximum potential profits of $0.93 per contract if shares in DELL settle at $15.00 at expiration. But, if the position turns out to be not quite bearish enough, investors start losing money beneath a breakeven share price of $14.07.

CAG – ConAgra Foods, Inc. – The branded food company with well-known names such as Chef Boyardee and Hebrew National in its portfolio attracted bullish players to its options this morning. Shares in ConAgra rallied as much as 4.3% earlier in the session to secure an intraday- and new 52-week high of $25.82 on news the company raised its bid for Post cereals and generic food products producer Ralcorp, to $4.9 billion, or $86.00 a share, up from $82.00 a share in March. Investors expecting the price of ConAgra’s shares to extend gains in the near term picked up around 2,600 now in-the-money calls at the May $25 strike for an average premium of $0.57 each. Call buyers at this strike profit if shares in CAG exceed the average breakeven price of $25.57 at expiration in a couple of weeks. Bullish sentiment spread to the higher May $26 strike where some 800 call options were purchased at an average premium of $0.30 a-pop. More than 900 calls changed hands at this strike on zero open positions. Investors long the May $26 strike calls make money if shares in ConAgra rally another 1.85% over today’s high of $25.82 to surpass the average breakeven price of $26.30 by expiration day. Similar buying behavior was seen out at the June $26 strike where investors paid an average premium of $0.35 per contract to get long roughly 1,300 call options. In-the-money call selling at the June $25 strike may be the work of traders taking profits off the table. Open interest patterns at that strike suggest the majority of the positions were initiated by investors buying calls on April 15 for an average premium of $0.38 per contract. Today traders sold 2,300 of the June $25 strike calls for an average premium of $0.95 each. Alternatively, investors selling the calls may be opening rather than closing positions to position for the price of the underlying to pull back ahead of June expiration. Options implied volatility on the stock shot up 23.6% to 18.87% by 11:45am in New York.

GPS – Gap, Inc. – Call options on the clothing retailer were trendy with some investors this morning as shares in The Gap surged 3.5% to $23.73 on takeover rumors. The stock pared a large portion of earlier gains after H&M dismissed the takeover chatter, leaving GPS shares up 1.6% on the day at $23.29 as of 11:55am. Investors acting ahead of H&M’s response picked up large numbers of out-of-the-money call options in the May and June contracts. H&M may have pulled the plug on the rumor mill for now, but some call buyers may want to hold on to their calls if they expect Gap, Inc. to exceed expectations when the company reports first-quarter earnings after the final bell on May 19, 2011. Traders this morning made a bee-line to the front month, trading more than 8,800 calls at the May $24 strike, and some 14,650 calls at the higher May $25 strike. Most of the calls were purchased for average premiums of $0.46 and $0.28, respectively. The feeding frenzy spread to the June contract where investors honed in on the June $25 strike calls. More than 13,100 call options changed hands at that strike on previously existing open interest of 2,077 contracts. The change, or lack thereof, in open interest at these strikes overnight will give a sense of whether investors chose to hold their positions beyond the intraday burst of rumor-driven trading. Options implied volatility on the clothing retailer is up 18.1% to arrive at 34.43% just before 12:10pm.

XLNX – Xilinx, Inc. – Shares in the semiconductor company rose 1.4% early on in the trading session to secure an intraday high of $35.38, but some options traders are positioning for the price of the underlying to rally harder in the next couple of months. May contract call options are the most active on Xilinx in early-afternoon trade. Investors traded more than 3,500 calls at the May $36 strike on open interest of 647 contracts. It looks like the majority of these calls were purchased at an average premium of $0.38 apiece. Investors long the calls stand prepared to profit should shares in XLNX rally another 2.8% over the current price to exceed the average breakeven point at $36.38 ahead of May expiration. Xilinx’s shares recently hit a 52-week high of $35.42 on March 3, 2011. Traders speculating on a more substantial near-term rally picked up some 1,700 call options at the higher May $37 strike for an average premium of $0.16 each. Finally, more than 3,200 calls changed hands at the June $37 strike versus open interest of 1,015 contracts. Investors bought approximately 1,665 of the calls for an average premium of $0.50 a-pop. Call buyers at this strike make money if shares in the semiconductor maker climb 6.0% to trade above the average breakeven price of $37.50 at June expiration.

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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