Option Activity Alert: CVB Financial, Avon Products, NVIDIA

CVBF – CVB Financial Corp. – Put options on the holding company for Citizens Business Bank are in high demand today ahead of CVB Financial Corp.’s third-quarter earnings report, scheduled for release after the closing bell on October 21, 2010. Shares are currently down 0.12% at $8.05 as of 12:05 p.m., but the overall reading of options implied volatility on the stock is up 20.3% at 65.23% ahead of earnings. Investor demand for put options today also contributed to the greater reading of uncertainty, as measured by implied volatility. Options traders purchased approximately 30,000 puts outright at the December $5.0 strike for an average premium of $0.24 per contract. Roughly 33,400 puts changed hands at that strike thus far in the session versus total previously existing open interest on the stock of 24,488 contracts. Put buyers are perhaps anticipating weak results from the firm on Thursday evening. Investors holding the contracts are prepared to make money, from an expiration standpoint, should shares plummet 40.8% from the current price of $8.05 to breach the effective breakeven point to the downside at $4.76 by December expiration. However, investors may take profits ahead of expiration if CVBF’s shares falter following earnings because the value of the puts will appreciate in this scenario whether or not the contracts land in-the-money. The sharp decline in options implied volatility that often follows firms’ earnings announcements may adversely impact put buyers by weighing down premium on the puts, particularly if shares fail to decline substantially by expiration in December.

AVP – Avon Products, Inc. – Bullish activity on the global marketer and manufacturer of beauty products today suggests some investors are itching for a near-term rally in the price of the underlying shares. Avon Products’ shares increased as much as 2.3% in the first half of the session to touch an intraday high of $35.17. Speculation the firm may be a takeover target lifted the price of the undelrying up to $36.20, the highest since December 7, 2009, one week ago. Investors populating the November contract today appear to be anticipating continued upward movement in Avon’s shares. A number of bullish traders ditched downside protection, selling nearly 6,000 puts at the November $30 strike at an average premium of $0.10 each, and shedding roughly 5,000 puts at the higher November $33 strike for an average premium of $0.82 apiece. Put open interest at each of the strikes is sufficient to cover volume generated there this morning. This suggests some traders may be closing out previously established long put positions. Bulls also picked up in- and out-of-the-money call options, buying roughly 1,700 in-the-money calls at the November $36 strike for an average premium of $1.39 each, and coveting another 1,100 calls at the higher November $37 strike at an average premium of $0.87 a-pop. Call buyers also picked up 1,300 lots at the November $38 strike for $0.88 per contract, as well as 1,100 calls at the November $39 strike for an average premium of $0.61 each. Investors holding these contracts are well positioned should Avon’s shares continue to climb ahead of expiration. Avon Products’ overall reading of options implied volatility is up 10.1% to arrive at 42.80% in early afternoon trading.

NVDA – NVIDIA Corp. – It looks like one long-term bullish options trader initiated a delta neutral buy-write strategy on the chip maker this morning. NVIDIA’s shares are down slightly by 0.45% to stand at $11.31 just before 12:20 p.m. in New York. The investor appears to have purchased 135,000 shares of the underlying stock at a price of $11.15 each, and sold 15,000 calls at the January 2011 $17.5 strike at a premium of $0.09 per contract on a 0.09 delta. The transaction suggests the trader, who is now long the stock, is bullish on NVDA going forward. The sale of the deep out-of-the-money calls partially reduces the price paid per share, and provides an effective exit strategy for the investor if the calls land in-the-money at expiration. The obscene rally required for the calls to land in-the-money suggests this could be a position initiated to hedge a potential takeover, or renewed rumors of such an occurrence. NVDA is slated to reveal its performance for the third quarter after the market closes on November 4, 2010. Options implied volatility on the stock is up 5.5% at 45.84% as of 12:30 p.m. in New York.

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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