Option Activity Alert: Perrigo, Automatic Data Processing, Campbell Soup

PRGO – Perrigo Co. – Shares of the manufacturer and distributor of over-the-counter and generic prescription pharmaceuticals are up 0.40% to stand at $67.24 this morning after the firm reported first-quarter earnings and raised its fiscal-year earnings forecast. The largest store-brand maker of OTC drugs recorded a 43% increase in profit, earning $74.4 million in the first quarter, as well as a 21% rise in revenue, posting sales of $641.3 million. Perrigo said it sees fiscal 2011 earnings coming in between $3.28 and $3.43 a share, up from earlier predictions of $3.08 to $3.28 per share. The drug maker appeared on our ‘hot by options volume’ market scanner in the first half of the trading session after one options strategist purchased a put spread in the December contract. The investor may be taking an outright bearish stance on PRGO because he expects shares to reverse course, alternatively the trader may have initiated the spread to protect the value of a long position in the underlying shares. It looks like the put player picked up 2,050 lots at the December $65 strike for an average premium of $2.31 each, and sold the same number of puts at the lower December $60 strike at an average premium of $0.71 apiece. The net cost of the transaction amounts to $1.60 per contract, thus positioning the trader to profit, or realize downside protection, if PRGO’s shares fall 5.7% from the current price of $67.24 to breach the effective breakeven point at $63.40 by December expiration. Maximum potential profits of $3.40 per contract are available to the investor should Perrigo’s shares plunge 10.75% lower to trade below $60.00 by expiration day next month.

ADP – Automatic Data Processing, Inc. – The provider of business outsourcing services such as payroll, tax and benefits administration solutions popped up on our scanners after one options player ramped up bullish sentiment on the stock. ADP’s shares increased as much as 0.90% during the first half of the trading day to touch an intraday high of $45.13. The options trader populating Automatic Data Processing is revisiting the stock it seems in order to roll a sizeable position in near-term call options up to a higher strike price in the December contract. It looks like the trader originally purchased 5,000 calls at the November $44 strike for an average premium of $0.44 apiece back on September 30, 2010, when the price of the underlying shares were trading around $42.13. The subsequent appreciation in ADP’s shares boosted premium on the now in-the-money calls at the November $44 strike, allowing the trader to sell all 5,000 lots for a premium of $1.23 today. Average net profits on the sale of the call options amounts to $0.79 per contract. Next, the investor extended bullish sentiment on ADP by picking up a fresh batch of 5,000 calls at the higher December $46 strike for a premium of $0.54 apiece. Profits start to accumulate on the new position – from an expiration standpoint – if shares rally another 3.1% over today’s high of $45.13 to surpass the effective breakeven price of $46.54 by December expiration.

CPB – Campbell Soup Co. – Shares of the global manufacturer of branded convenience food products are up slightly by 0.15% this afternoon to trade at $36.25 as of 12:30 pm. The soup maker appeared on our ‘hot by options volume’ market scanner after a long-term bullish player initiated a debit call spread in the January 2012 contract. The investor appears to have purchased 3,000 in-the-money calls at the January 2012 $35 strike for a premium of $3.60 each, marked against the sale of the same number of calls at the higher January 2012 $40 strike at an average premium of $1.425 apiece. Net premium paid to establish the spread amounts to $2.175 per contract. Thus, the trader starts to make money if CPB’s shares increase 2.55% over the current value to surpass the average breakeven price of $37.175 by expiration. The investor may walk away with maximum potential profits of $2.825 per contract if Campbell’s shares surge 10.3% to trade above $40.00 ahead of expiration day. The food products company currently touts a 52-week high of $37.59, attained back on August 30, 2010.

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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