Stock Options Watch: SPLS, PETM, FURX

By Jan 28, 2013, 3:14 PM Author's Blog  

PETM – PetSmart, Inc. – Shares in the specialty retailer of products and services for pets and their owners fell sharplythis morning on a downgrade to ‘reduce’ from ‘neutral’ at Nomura, with the stock currently trading 7.4% lower on the session at $64.81 as of 11:25 a.m. ET. A sizable bearish options strategy initiated on PetSmart in the early going suggests one trader is bracing for shares to extend declines during the next couple of months. It looks like the strategist purchased a 2,000-lot March $60/$65 put spread for a net premium of $1.55 per contract. The bearish position starts making money if shares in PETM decline 2.1% from the current price of $64.81 to breach the effective breakeven point at $63.45. Maximum potential profits of $3.45 per contract are available on the spread in the event that shares drop more than 7.4% to settle below $60.00 at April expiration. Two weeks ago we noted a similar bear put spread initiated on PETM; the similar-sized position was an April $60/$65 put spread purchased at a net premium of $1.80 per contract. Both positions result in maximum possible profits if shares in PetSmart drop to $60.00 by expiration in March and April.

FURX – Furiex Pharmaceuticals, Inc. – Shares in Furiex Pharmaceuticals are soaring today, up 52% to stand at $32.33 just before midday in New York, after the company confirmed that its partner, Japanese firm Takeda Pharmaceutical Co., received approval from the U.S. FDA for three new type 2 diabetes therapies designed to treat the disease in adults in combination with diet and exercise. Furiex options, which typically see daily volume of around 33 contracts on average, are far more active than usual on news of the approval, with volume topping 1,685 contracts during the first half of the session. Put options are more active than calls, with roughly two puts in play for each single call option. The stock this morning rallied 55% to an all-time high of $32.97, but had already started making moves to the upside at the start of the New Year.Shares tacked on nearly 20% from December 31stthrough the end of last week, and may have prompted some of the protective positioning observed in FURX options this past Friday. The largest increase in open interest on Friday was in the Feb. $17.5 strike put, with around 200 lots purchased at a premium of $0.75 apiece. The more than 50% rally in the price of the underlying today now finds premium on the $17.5 strike puts has collapsed down to $0.05 apiece, resulting in near destruction of value in the contracts for Friday’s buyers. In contrast, buyers of roughly 80 calls at the Feb. $20 strike for an average premium of $2.06 apiece during the first few weeks of January, find premium on those deep in-the-money calls has jumped to around $12.60 each this afternoon. Furiex was rated new ‘buy’ with a 12-month target price of $45.00 a share at Canaccord Genuity today.

SPLSStaples, Inc.Call options on office supplies retailer, Staples, Inc., are active this morning, with shares in the name up better than 2% on the session to stand at $13.25 as of 11:40 a.m. ET. The pop in upside call activity on Staples today may follow positive analyst comments on the retailer, with the stock receiving an upgrade to ‘neutral’ from ‘sell’ at Goldman Sachs. Trading traffic in SPLS options is heaviest out at the June $14 strike where upwards of 17,900 calls have changed hands versus open interest of 2,002 contracts. It looks like most of the calls were purchased this morning for an average premium of $0.69 apiece, thus positioning buyers to profit in the event that SPLS shares rally another 11% to surpass the average breakeven price of $14.69 by June expiration. Shares in Staples last traded above $14.69 in May 2012. The company is scheduled to report fourth-quarter earnings ahead of the opening bell on March 6th.

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