Option Activity Alert: Electronic Arts, Lincoln National, General Electric

ERTS – Electronic Arts, Inc. – Options traders expecting the video game maker’s shares to decline initiated near-term bearish plays on the stock right out of the gate this morning. Electronic Arts’ shares are currently down 0.45% to stand at $15.89 as of 11:40 a.m. in New York. It looks like one investor may have enacted a bearish credit call spread in the November contract. The pessimistic player appears to have sold 3,500 calls at the November $16 strike for a premium of $0.75 each in order to buy the same number of calls at the higher November $17 strike at an average premium of $0.42 a-pop. The investor pockets a net credit of $0.33 per contract on the trade and keeps the full amount of premium as long as ERTS shares fail to rally above $16.00 through November expiration. The credit spreader is vulnerable to losses, however, if shares rally above the effective breakeven price of $16.33 ahead of expiration day. The investor will absorb maximum potential losses of $0.67 per contract if the video game company’s shares exceed $17.00 at expiration in November. We note that call open interest at the November $17 strike is sufficient to cover the 3,500 lots traded there this morning. The investor may be closing out a previously established short stance in calls in order to take profits off the table and subsequently roll the short position to the November $16 strike. In this scenario, the trader’s loss potential is uncapped should ERTS shares fly upward ahead of expiration day. Electronic Arts is scheduled to report second-quarter earnings after the market closes on November 8, 2010.

LNC – Lincoln National Corp. – Options activity on Lincoln National Corp. today suggests a number of investors are positioning for a substantial near-term rally in the price of the underlying stock. Shares of the operator of insurance and retirement businesses are presently up 1.80% in early afternoon trading to arrive at $25.54 as of 12:50 p.m. Investors populating LNC today have all but ignored put options for the time being, focusing their attention instead on bullish call options. Trading traffic in calls is heaviest in the November contract and is likely the work of investors taking bullish stances on the Lincoln National Corp. ahead of the firm’s third-quarter earnings report after the closing bell on November 2, 2010. Options traders picked up approximately 1,700 calls at the November $26 strike for an average premium of $1.20. Another 1,600 calls were coveted at the higher November $27 strike at an average premium of $0.80 each. These investors make money if Lincoln’s shares exceed the breakeven prices of $27.20 and $27.80, respectively, by expiration day next month. Bullish players also purchased another 2,400 calls at the November $28 strike for an average premium of $0.51 a-pop. Investors holding these contracts are prepared to make money should the price of the underlying shares surge 11.6% over the current price of $25.52 to exceed the average breakeven price of $28.51 by November expiration.

GE – General Electric Co. – Within the first 15 minutes of the trading session one big options market participant sold approximately 105,000 call options on General Electric. It looks like the investor is throwing in the towel on GE today, selling-to-close a previously established bullish stance on the stock. Shares of the firm are currently down 0.80% to stand at $16.17 by 12:20 p.m. in New York trading. GE’s shares fell 5% on Friday following earnings. While the company reported better-than-expected profits and saw orders for industrial goods and services rise for the first time in two years, the soft current sales reported for industrial equipment disappointed the Street and sent shares lower. The enormous transaction in calls today appears to be the work of an investor who originally purchased the contracts at the November $19 strike for an average premium of $0.11 apiece back on October 11, when the stock was trading around $17.05. Today, selling 105,000 calls at that strike yields an average premium of just $0.01 apiece. Unraveling the massive bullish bet today indicates the responsible party no longer sees GE’s shares soaring above $19.00 by November expiration.

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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