Option Activity Alert: KSS, AEP, FCX, SPLS

KSS – Kohl’s Corp. – The department store operator’s shares jumped 4.25% this afternoon to an intraday high of $55.90 following the company’s first-quarter earnings release ahead of the open this morning. Kohl’s Corp. raised its full-year profit forecast to a range of $4.25 to $4.40 a share, which tops average analyst estimates of around $4.36 a share. Some strategists browsing through Kohl’s options today are positioning for the stock to extend gains, while others could be taking profits on pre-earnings positions or taking a more bearish stance on the stock in the near term. Traders picked up around 2,200 now in-the-money calls at the May $55 strike for an average premium of $0.47 each. Call buyers at this strike make money if shares in KSS exceed the average breakeven price of $55.47 through expiration next week. Meanwhile, put and call selling took place in the June contract. Traders sold roughly 1,160 calls at the June $52.5 strike for an average premium of $3.10 each, and shed 1,900 calls up at the June $55 strike at a premium of $1.40 apiece. Open interest in the June $52.5 strike calls suggests investors bought some 5,090 calls at that strike for an average premium of $1.68 each back on April 26. Traders selling the now deep in-the-money calls could be cashing in on their well-placed bullish positions. On Tuesday, around 1,000 calls were picked up at the June $55 strike for an average premium of $0.70 each. The subsequent rally in the price of the underlying has these contracts trading with an asking price of $1.70 per contract as of 2:15pm. Volume of 2,200 calls at the June $55 strike exceeds open interest of 1,592 contracts. Nearly all of the calls exchanged at that strike sold for an average premium of $1.40 each. Perhaps call sellers see shares in Kohl’s trading below $55.00 at expiration in June. Put players sold around 2,000 contracts at the June $52.5 strike at a premium of $0.90 each. Sellers of the put options may be ditching downside protection or initiating bullish stances on the stock. Finally, trading traffic is heaviest out at the October $60 strike, where investors purchased the majority of the 4,500 calls traded there for an average premium of $1.28 each. Traders holding these contracts make money in the event that the department store operator’s shares climb 9.6% over today’s high of $55.90 to surpass the average breakeven price of $61.28 by October expiration. Options implied volatility on the stock dropped 18.5% this afternoon to 20.07%, post earnings.

AEP – American Electric Power Co., Inc. – Shares in public utility holding company American Electric Power surged 2.8% today to secure an intraday- and new 6-month high of $37.72 on unconfirmed reports the company is looking for a merger partner. Similar speculation regarding AEP’s rumored merger plans has surfaced in the recent past. Investors flocked to the options market straight out of the gate this morning to initiate positions on the stock. Trading traffic is heavy in AEP call options, and it looks like the majority of strategists are positioning for the price of the underlying to surpass its 52-week high of $37.79 in the near future. The sharp rise in demand for options on the provider of electric power sent the stock’s overall reading of options implied volatility up 36.2% to 17.93% by 12:45pm in New York. Traders expecting shares to continue to climb picked up around 1,100 now in-the-money calls at the May $37 strike for an average premium of $0.48 each. Mixed trading at the May $38 strike, where more than 4,600 calls changed hands against open interest of 2,746 contracts, suggests both buyers and sellers are interested in the options today. Investors at this strike paid/received an average premium of $0.13 per contract, with the longs hoping to see shares top $38.13 by next Friday, and the shorts positioning for shares to settle below $38.00 at expiration. Call buyers drove volume at the June $38 strike up sharply, trading some 7,300 calls at that strike on paltry previously existing open interest of just 164 contracts. Nearly all of these calls were purchased for an average premium of $0.48 each. Bullish players holding these contracts make money if AEP’s shares rally another 2.0% over today’s high of $37.72 to surpass the average breakeven price of $38.48 by expiration day next month. Call buyers initiated the majority of positions at the higher June $39 and $40 strikes today, as well.

FCX – Freeport-McMoRan Copper & Gold Inc. – Prices in gold and silver continued to descend this morning, falling sharply earlier in the session along with other commodities at the tail-end of a tough week overall for the sector. The metals have rebounded substantially off their session lows this afternoon, but even so remain in the red as of 1:10pm in New York. For one options player populating international mining company Freeport-McMoRan today, the commodities-meltdown is perhaps just a blip on the radar screen. The investor purchased a sizable call spread on FCX in the January 2012 contract that yields maximum profits if shares in the name soar to their highest ever by expiration day. Freeport’s exposure to copper, which trades higher today while other metals continue to struggle, may have attracted the bullish player, as well. Shares in the mining company with the largest single recoverable copper reserve and a single gold reserve of any mine in the world are currently up 2.15% to arrive at $49.31 this afternoon. The trader looked to the January 2012 contract, buying around 5,600 calls at the $51.5 strike, and selling the same number of calls up at the $64.5 strike, all at a net cost of $3.65 per contract. The investor profits if shares in Freeport-McMoRan rally another 11.8% over the current price of $49.31 to surpass the effective breakeven point on the spread at $55.15 by expiration day in January 2012. Maximum potential profits of $9.35 per contract are available to the trader should shares soar 30.8% higher over the next eight months to top $64.50 at expiration. Shares in the mining company were trading as high as $61.35 in the most recent six months.

SPLS – Staples, Inc. – Investors are picking up put options on Staples this morning ahead of the company’s first-quarter earnings report next Wednesday. Shares in the office supplies retailer earlier fell 0.74% to touch an intraday low of $20.10, but have since turned positive to stand 0.25% higher on the session at $20.30 as of 11:20am in New York. Options players traded more than 2,200 puts at the May $20 strike today against open interest of 1,481 contracts. It looks like the majority of the puts were purchased for an average premium of $0.35 apiece. Put buyers may be bearish on the stock heading into earnings, or could be using the puts to hedge a long position in the underlying shares. Investors paying an average premium of $0.35 per contract for the options make money if shares in Staples drop 3.2% from the current price of $20.30 to breach the average breakeven point on the downside at $19.65 by May expiration. SPLS shares last traded below $19.65 at the beginning of April 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.

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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