Option Activity Alert: ODP, JPM, GWW, BUD

ODP – Office Depot, Inc. – Call options are flying off the shelves at office supplies retailer Office Depot today, with shares in the Boca Raton, Florida-based company surging 9.5% to $2.53 just before 1:45 pm ET. It looks like investors have exchanged 18,677 options on Office Depot thus far today, where all but 716 of the contracts are calls. The now in-the-money September $2.5 strike call is by far the most active this afternoon. More than 14,000 calls have changed hands at that strike, and it appears the majority of the contracts were purchased for an average premium of $0.15 apiece. Demand for the Sept. $2.5 strike calls was evident straight out of the gate this morning, as some 3,000 contracts were picked up at a premium of $0.10 each within the first 10 minutes of the opening bell. Call volume jumped in afternoon trade, where it now appears that at least 12,500 contracts were purchased at the $2.5 strike price. September contract calls have a few days remaining before they expire at the end of the week. Perhaps buyers of the calls are expecting Office Depot’s shares to extend gains through Friday. Call buying spread to the October $2.5 strike where some 2,000 contracts were purchased for a premium of $0.30 a-pop. Another 1,000 calls appear to have been purchased up at the October $3.0 strike at a premium of $0.15 apiece. Investors holding the longer-dated October contract call options profit in the event that ODP’s shares exceed the effective breakeven prices of $2.80 and $3.15 at expiration, respectively. The options expire well in advance of Office Depot’s third-quarter earnings report ahead of the opening bell on October 26.

JPM – JPMorgan Chase & Co. – Shares in JPMorgan may be on the rise today, but put activity on the stock suggests the price of the underlying may hit fresh multi-year lows in the weeks ahead. It looks like one or more options traders selling puts in the front month and buying debit put spreads in the October contract see little danger of a sharp correction in the stock through the end of this week. The five weeks remaining to October expiration, however, could see JPM’s shares drop to their lowest since March 2009. JPMorgan is scheduled to report third-quarter earnings on October 13 ahead of the opening bell. Shares in the banking institution rose 0.90% to $32.71 by 12:35 pm ET, somewhat lessening the stock’s total 2011 declines to a still dismal 32.4%. The sale of at least 9,000 puts at the September $32.5 strike for an average premium of $0.64 apiece this morning suggests, perhaps, that investors expect JPM’s shares to exceed that price level through expiration on Friday. Traders short the puts keep the $0.64 in premium as long as the options expire worthless at the end of the week.

Put selling in the front month may have been initiated to partially finance the purchase of the October $25/$30 put spread for a net premium of $0.91. Premium received on the sale of the near-term puts could reduce the net cost of the bear put spread down to an average premium of $0.27 per contract. The Oct. $25/$30 put spread positions the investor or investors responsible for the bearish strategy to accrue maximum potential profits of as much as $4.73 per contract in the event that JPM’s shares plunge 23.5% from the current price of $32.71 to trade below $25.00 at expiration next month. Put players may be expecting shares to fall after JPM’s third-quarter earnings report on October 13. The company’s investment banking chief, James Staley, said JPMorgan’s trading revenue may fall 30% in the third quarter from the previous quarter, and the private-equity unit may report a “modest loss”, as well. (Staley’s comments at the Barclays Global Financial Services Conference in New York today were highlighted in a note by Bloomberg reporter, Dawn Kopecki.)

GWW – W.W. Grainger, Inc. – A bearish put spread on the provider of facilities maintenance products, services and information may yield substantial profits to one trader should shares in W.W. Grainger, Inc., drop sharply in the five weeks remaining to October expiration. Shares in GWW are up 3.35% this afternoon to stand at $156.80, which is just a few dollars shy of its July 7, 2011, all-time high of $160.50. The Chicago, Illinois-based company yesterday reported a 10% increase in August sales, and presented this morning at the Morgan Keegan Industrial/Transportation Conference in Chicago. GWW’s shares have performed well in an environment of challenging macro conditions, although the stock did retreat roughly 22.5% off its July 7 high down to $124.33 on August 9. Shares have come roaring back in the past few weeks, but one options player is prepared should the price of the underlying retreat once more ahead of expiration next month. It looks like the trader purchased the 500-lot October $135/$145 put spread at a net premium of $2.00 per contract. The investor makes money if shares in GWW fall 8.8% from the current price of $156.80 to breach the effective breakeven point on the downside at $143.00 at expiration. Maximum potential profits of $8.00 per contract are available to the trader should the stock drop 13.9% in the next five weeks to trade below $135.00 at expiration day. The put spread may be an outright bearish bet anticipating a pullback in GWW’s future, or could be the work of an investor hedging a long position in the underlying shares.

BUD – Anheuser-Busch InBev SA – Heavier-than-usual trading in call and put options covering the brewing company with a portfolio of over 200 beer brands including Budweiser, Stella Artois and Hoegaarden, caught our attention this morning. Prints in October contract call and put options may be the work of traders selling straddles on Anheuser-Busch InBev, which could yield maximum possible profits if BUD’s shares remain flat through expiration day next month. Shares in the brewing company are up 0.10% to stand at $50.26 as of 1:05 pm in New York. It looks like investors expecting BUD’s shares to remain range-bound through October expiration sold some as many as 500 calls at the Oct. $50 strike for a premium of $2.15 each, and sold around 500 puts at the same strike for a premium of $2.59 apiece. The largest single blocks traded 200 times within 7 minutes of the opening bell. Traders selling straddles may walk away with maximum potential profits of $4.74 per contract if shares in BUD settle at $50.00 at expiration. Some portion of the premium is retained unless shares swing outside of the average breakeven prices of $54.74 to the upside and $45.26 on the downside. Subsiding levels of options implied volatility on the stock may benefit straddle sellers, as well. Volatility today stands 5.6% lower on the session at 37.2% 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.

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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