Option Activity Alert: Adobe Systems, PulteGroup, ConocoPhillips

ADBE – Adobe Systems, Inc. – One optimistic options investor purchased a call spread on the software company this morning in order to position for a rebound in the price of the underlying shares by January 2011 expiration. The bullish transaction is somewhat contrarian on a day when Adobe’s shares are down 1.30% to stand at $26.53 as of 11:40 am ET. The trader appears to have purchased some 2,000 calls at the January 2011 $28 strike for an average premium of $1.39 each, and sold roughly the same number of calls at the higher January 2011 $32 strike at an average premium of $0.39 apiece. Net premium paid to establish the spread amounts to an average of $1.00 per contract. Thus, the investor is prepared to make money should Adobe’s shares surge 9.30% over the current price of $26.53 to exceed the effective breakeven point at $29.00 by expiration day. Maximum potential profits of $3.00 per contract are available to the call-spreader if ADBE’s shares jump 20.60% to trade above $32.00 by expiration next January.

PHM – PulteGroup, Inc. – Options investors populating the homebuilding company utilized November contract calls in such a way as to suggest the current rally in the price of the underlying stock is running on empty. PulteGroup’s shares increased 1.25% to $8.83 by 11:55 am ET after analysts at Goldman Sachs upped their target price on PHM to $9.00 from $8.00 and upgraded the stock to ‘neutral’ from ‘sell’. Pessimistic players sold approximately 9,500 calls outright at the November $9.0 strike to take in an average premium of $0.48 apiece. The sale of the call options indicates that investors, particularly if they hold no position in the underlying shares, expect PHM shares to trade below $9.00 through expiration day in November. Call sellers keep the full $0.48 premium received as long as the calls are trading out-of-the-money at expiration. Uncovered call selling is an unlimited risk strategy and in this scenario investors start to lose money over-and-above the premium pocketed on the transaction if PHM’s shares rally 7.4% to trade above the effective breakeven price of $9.48 ahead of expiration day. PulteGroup is scheduled to report third-quarter earnings on November 3, 2010, before the market opens. The homebuilder’s shares last traded above $9.00 back on August 2, 2010, but have not topped $9.48 since June 21, 2010.

COP – ConocoPhillips – Near-term put options are popular with ConocoPhillips players today even with shares rallying up 1.2% to $56.94 by 12:30 pm ET. More than 12,000 puts changed hands at the October $55 strike for an average premium of $0.66 apiece in morning trading. It looks like at least 7,600 of those contracts were purchased. Perhaps put buyers are long COP shares and simply building up downside protection to lock in gains realized during the month of September. Alternatively, traders could be initiating outright bearish bets on ConocoPhillips, hinting that stormier seas are ahead. Investors buying the puts outright are poised to profit should COP’s shares fall 4.6% from the current price of $56.94 to breach the average breakeven point on the downside at $54.34 by October expiration. COP is scheduled to report third-quarter earnings on October 28, 2010, which is well past the point at which the October contract options expire.

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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