Option Activity Alert: DWA, GPS, SM, ACHN

DWA – Dreamworks Animation SKG, Inc. – The creator of family-favorite feature films such as the Shrek movies and more recently, Puss in Boots, popped up on our ‘hot by options volume’ market scanner this morning after a large block of call options changed hands in the December contract. It looks like the investor responsible for the transaction may be writing the calls, perhaps in the expectation that shares in Dreamworks Animation are unlikely to increase much from their current level. Shares in DWA currently trade 0.90% lower on the day at $17.24 as of 12:45 PM in New York. The investor appears to have sold 6,000 calls outright at the Dec. $17.5 strike for a premium of $0.75 per contract. The trader walks away with the full amount of premium in hand, a total of around $450,000, as long as shares in Dreamworks settle below $17.50 at expiration next month. While the calls do not appear to be tied to any simultaneous transaction in the underlying stock, it is possible the investor is already long the stock and selling covered calls. However, if the trader is naked short the call options, he could face potentially devastating losses in the event that shares spike higher in the next four weeks. In the latter scenario, the investor starts losing money on the position if shares rally 5.9% to surpass the effective breakeven price of $18.25 at expiration.

GPS – The Gap, Inc. – Shares in the operator of the Gap and Banana Republic fell 3.6% to $18.56 on Friday following the San Francisco, California-based company’s third-quarter earnings report after the final bell on Thursday. The largest U.S. clothing retailer earned $0.38 a share in the quarter, which beat average analyst expectations of $0.36 a share, however, the company reported sales of $3.58 billion, missing the consensus estimate of $3.59 billion. One bearish options trader appears to be positioning for the price of the underlying to continue to head south for the winter. It looks like the investor purchased a 1,500-lot Dec. $15/$18 put spread for an average net premium of $0.53 per contract. The strategist may profit at expiration in the event that GPS shares decline another 5.9% to breach the average breakeven price of $17.47. Maximum potential profits of $2.47 per contract are available to the trader should shares in Gap, Inc. drop another 19.2% to trade at or below $15.00 at December expiration.

SM – SM Energy Co. – The oil and gas exploration and development Company’s shares retreated Friday, extending a losing streak that picked up steam in the second half of the trading week. Shares today trade 2.5% lower to arrive at $77.54 as of 1:00 PM ET, but have dropped 11.0% off their November-high of $87.09 secured back on Wednesday afternoon. A large position initiated in the February 2012 contract may be one investor’s way of preparing for shares to continue to plunge over the next few months. It looks like the trader purchased 10,000 puts at the Feb. 2012 $40 strike for a premium of $0.65 a-pop. The put player may profit at expiration day in February if shares in SM Energy Co. nearly halve in value to trade below the effective breakeven point at $39.35. The stock last traded below $39.35 back in October 2010.

ACHN – Achillion Pharmaceuticals, Inc. – The biotechnology company popped up our screens this morning due to greater-than-normal activity in its call and put options. Shares in Achillion Pharmaceuticals are up more than 8.0% to stand at $5.84 in early-afternoon trade on news the company is in talks with potential partners and acquirers ahead of the expected year-end release of clinical data on three experimental hepatitis-C therapies. It looks like at least one options player is taking a cautious stance on the stock, perhaps to prepare for shares in the name to reverse course should talks or anticipated clinical data ultimately disappoint. More than 2,000 puts changed hands at the Dec. $5.0 strike against previously existing open interest of 1,516 contracts. It appears most of the puts were purchased for an average premium of $0.25 apiece. Put buyers may profit at expiration next month if shares in Achillion fall 18.7% from the current price of $5.84 to breach the average breakeven point on the downside at $4.75.

About Caitlin Duffy 373 Articles

Affiliation: Interactive Brokers

Caitlin Duffy joined Interactive Brokers in 2009. In her role as Equity Options Analyst, Caitlin provides daily market commentary; highlighting various options trades, trading patterns and strategies of interest. Through Interactive Broker's webinar program, Ms. Duffy presents a number of educational, options-related events describing the theoretical pricing of options, the option Greeks as well as options strategies.

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