Option Activity Alert: RIMM, ULBI, NABI, CX

Strong corporate earnings helped fuel the S&P 500 Index’s more than 30% rally since the end of last summer up to its highest point at 1370 at the start of May. A number of companies are scheduled to report earnings today, including beleaguered Blackberry maker Research In Motion Ltd. Will another spate of potentially strong corporate results inject renewed confidence into the market? Or, will earnings disappoint this quarter as companies struggle with higher energy and commodity prices? Even positive earnings surprises may not be enough to spur the return of risk appetite as less than palatable reports regarding the ongoing European debt crisis push global equities lower and leave investors with a sour taste in their mouths. Domestically, a gain in housing starts and building permits in May as well as a decline in jobless claims last week, give the market some good news to pocket today following Wednesday’s pullback.

RIMM – Research In Motion Ltd. – Options activity on the maker of Blackberry smartphones and PlayBook tablets suggests investors are harboring mixed opinions regarding the direction RIMM’s shares are likely to take following the company’s first-quarter earnings report after U.S. markets have closed for the day. Shares are off their highs of the day, but remain positive in early-afternoon trade. The stock currently trades 0.50% higher on the session at $35.35 just before 12:45pm on the East Coast. Options volume is pushing 110,000 contracts, with investors paying roughly equal attention to call and put options. Trading traffic is heaviest in options with only one trading day remaining to expiration. It looks like some investors are positioning for disappointment, with the majority of the June $32.5 strike puts trading purchased for an average premium of $0.54 apiece. June $30 strike puts are popular as well, although it looks like equal numbers of buyers and sellers are trading these contracts. Signs of pre-earnings release optimism are also apparent on RIMM this afternoon. Call buyers in the front month are slightly more active than sellers of the calls. June $40 strike calls are the most active, with more than 9,000 lots exchanged at that strike so far today. Call and put options expiring in July indicate bulls and bears are initiating, or possibly closing out, positions on the Blackberry maker ahead of the earnings report. The pace of trading in RIMM options will likely accelerate further as the conclusion of the trading session approaches.

ULBI – Ultralife Batteries, Inc. – The manufacturer of rechargeable and non-rechargeable batteries and other electrical components popped up on our ‘hot by options volume’ market scanner at the start of the trading session after more than 2,200 puts changed hands on the stock against overall previously existing open interest of just 781 contracts. Shares in Ultralife Batteries are currently down 0.40% to stand at $4.73 as of 11:50am in New York trade. It looks like one or more long-term bearish options strategists picked up around 2,000 in-the-money puts at the December $5.0 strike for an average premium of $0.75 apiece. Long puts at this strike may be a profitable venture if shares in the battery maker drop 10.15% from the current price of $4.73 to breach the effective breakeven point at $4.25 at expiration in December. Ultralife is scheduled to report second-quarter earnings before the market opens for trading on July 28.

NABI – NABI Pharmaceuticals, Inc. – Long-term bull trading in options on the biotechnology company caught our eye this afternoon amid a more than 4.1% rally in NABI’s shares to $4.97. The Rockville, MD-based company engaged in the development of vaccines in the areas of nicotine addiction and infectious disease appeared on our scanners after one or more options strategists purchased approximately 1,000 calls at the December $7.5 strike for an average premium of $0.79 a-pop. Call buyers are positioned to profit at expiration if the price of the underlying stock jumps 66.8% over today’s high of $4.97 to exceed the average breakeven price of $8.29. Of course, with roughly six months remaining to December expiration, the stock need not rally quite so furiously in order for the trade to be advantageous. The value of the calls may increase substantially with more moderate share price improvement or with higher levels of implied volatility on the stock. The erosion of extrinsic value of the call options may work against the trader, particularly as expiration nears and if shares are little changed. Call buyers risk losing the full amount of premium paid for the options at expiration if shares are trading below $7.50. NABI’s traded within $0.11 of $7.50 back in November 2006, but have not exceeded $8.29 since 2005.

CX – Cemex, S.A.B. de C.V. – The cement maker’s shares have had a rough go of it in the first half of 2011. CX’s shares were up around $10.72 on the first trading day of the year, but have since dropped roughly 29.6% to touch a fresh six-month low of $7.55 on Monday. The stock was in positive territory earlier today, but has since gone flat to trade at $7.72 as of 1:40pm in New York. It looks like one options trader may have taken profits off the table this morning by closing out a previously established bearish stance on the stock. It seems a prudent move with shares in CX making moves to the upside on-and-off during trading today. The investor appears to have purchased approximately 10,000 puts at the June $8.0 strike for an average premium of $0.20 each back on May 19 when shares in CX were trading around $8.30. The subsequent decline in the price of the underlying sent the value of the puts up to as high as $0.40 each on Wednesday, but the rebound in the stock today pulled the price of the in-the-money puts lower. Though the trader did not exit the position yesterday, it seems he was still able to sell the puts this morning at a premium to his initial cost. It looks like approximately 10,000 of the June $8.0 strike puts were sold today for an average premium of $0.30 each. If the buyer of the puts at $0.20 apiece back in May is in fact the same as the seller at $0.30 each this morning – note that it’s certainly possible they are not – the trader exits with gains of roughly 50% on the position in just under four weeks time. It will be interesting to see whether open interest at the June $8.0 strike drops close to zero overnight, suggesting the transaction was closing, or if perhaps open interest doubles and negates the scenario described herein. The June contract options have one trading day to go before expiration. Options implied volatility on Cemex is up 7% this afternoon to stand at 37.44% just after 2:00pm.

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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