Option Activity Alert: PCL, XLE, TIN, AEM

PCL – Plum Creek Timber Co., Inc. – Seattle, WA-based Plum Creek Timber Co. posted lower-than-anticipated second-quarter net income of $0.27 a share after the close on Monday, missing average the average analyst forecast of $0.29 a share to send the price of the underlying down as much as 4.2% today to $38.75. Put options on Plum Creek are active post-earnings, but it looks like much of the volume was generated by investors taking long-term bullish views on the stock. Trading traffic in PCL options is heaviest at the Jan. 2012 $38 strike where more than 2,700 puts changed hands against previously existing open interest of just 65 contracts. The majority of the puts exchanged at that strike appear to have been sold at an average premium of $2.32 per contract. Put sellers keep the full amount of premium received on the transaction as long as shares in Plum Creek Timber exceed $38.00 through expiration day in January. Traders short the puts have time erosion working in their favor, and may also benefit from subsiding levels of options implied volatility on the stock. Investors likely expect shares to resist above $38.00 over the next six months, but stand ready to take delivery of the stock at an effective price of $35.68 a share, on average, should the puts land in-the-money at expiration next year.

XLE – Energy Select Sector SPDR Fund – Massive prints in September contract call options covering the Energy SPDR appear to be the work of an investor adjusting a previously established bullish position on the sector. Shares in the XLE, an exchange-traded fund that tracks the performance of the Energy Select Sector of the S&P 500 Index, turned positive this afternoon to trade 0.10% higher on the day at $79.50 as of 1:00 pm in New York. We noted the original spread in our report dated Friday May 13 as a 52,250-lot September $79/$90 bull call spread, purchased at a net premium of $1.95 per contract ($2.23 – $0.28). Shares in the XLE at that time were trading around $73.70, having declined 8.8% in the first couple of weeks in May. The price of the underlying fund recovered somewhat in the latter half of the month, but would ultimately drop as low as $70.45 at the end of June. The bullish player stuck with the position throughout the pullback, and was rewarded for his patience as shares have burst to the upside in the past several weeks. Shares in the Energy ETF currently stand 7.9% higher than they were at the time the original spread was purchased in May.

The investor appears to be taking some profits off the table today, while extending bullish sentiment on the energy sector. It looks like the trader sold some 54,000 calls at the September $79 strike for an average premium of $2.79 apiece in order to purchase the same number of calls up at the higher September $83 strike at an average premium of $1.18 each. Open interest up at the September $90 strike suggests the trader is still short the calls at that strike, which he initially sold for $0.28 per contract back on May 13. The adjustment leaves the trader with the new massive September $83/$90 bull call spread, which yields maximum profits if shares in the XLE rally up to $90.00 by expiration day in a couple of months.

TIN – Temple-Inland, Inc. – The maker of corrugated packaging popped up on our scanners this morning after a large ratio call spread was initiated in the November contract. Earlier this month, International Paper, the world’s largest pulp and paper maker, took an offer to buy Temple-Inland for $3.31 billion directly to shareholders after management rejected the takeover bid. Shares in TIN are currently up 0.30% to arrive at $30.77 as of 12:40 pm ET. The stock is up more than 46% since International Paper made its first pass at Temple-Inland. An options strategist expecting the price of the underlying shares to rise in the next four months purchased 8,000 in-the-money calls at the November $30 strike for a premium of $2.75 each, and sold 16,000 calls up at the November $35 strike at a premium of $0.30 apiece. Net premium paid to initiate the bullish ratio spread amounts to $2.15 per contract. Thus, the investor stands prepared to profit should TIN’s shares rally another 4.5% over the current price of $30.77 to surpass the effective breakeven price of $32.15 by expiration in November. Maximum potential profits of $2.85 per contract pad the investor’s wallet in the event that shares jump 13.7% to settle at $35.00 at expiration. Temple-Inland reported better-than-expected second-quarter results last week, but the company will reveal its performance for the third quarter on October 20, which is well in advance of expiration for the November contract call options.

AEM – Agnico-Eagle Mines, Ltd. – Options traders positioning for shares in the Toronto, ON-based gold mining company to rally picked up in- and out-of-the-money calls on Agnico-Eagle Mines today. Bulls may be expecting the price of the underlying to head higher following the company’s second-quarter earnings report after the final bell on Wednesday. Shares in AEM increased as much as 1.1% this morning to secure an intraday high of $62.74. The stock rallied sharply towards the end of 2010, but commenced an eight-month decline starting in December. Shares currently trade at a 29% discount to AEM’s record high of $88.20, attained back on December 7, 2010. Investors expecting Agnico-Eagle’s shares to make a comeback purchased more than 9,000 calls at the September $65 strike for an average premium of $2.25 a-pop. Call buyers profit if shares surge 7.2% to surpass the average breakeven price of $67.25 by September expiration. More than 13,700 calls changed hands at the September $65 strike against previously existing open interest of just 399 contracts. Nearer-term optimists scooped up more than 1,000 in-the-money calls at the August $60 strike for an average premium of $3.85 each. Investors long the calls make money if shares in the gold producer increase 1.8% to trade above $63.85 at expiration day next month. The sharp rise in demand for AEM calls helped lift the overall reading of options implied volatility on the stock 6.2% ahead of earnings to 36.10% 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.

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