Option Activity Alert: HGSI, BSX, DFS

HGSI – Human Genome Sciences, Inc. – Shares in Human Genome Sciences are up 8.9% to trade around $26.49 in the final hour of the trading session on speculation the firm could become an attractive takeover target if its lupus drug treatment, Benlysta, wins approval next month. Options traders sent up a number of bullish signals using January 2011 contract call and put options. Earlier this morning, one optimistic investor initiated a debit call spread, buying 3,000 calls at the January 2011 $27 strike for a premium of $3.90 each, and selling the same number of calls at the higher January 2011 $40 strike at a premium of $0.375 apiece. The net cost of putting on the spread amounts to $3.525 per contract. The investor makes money on the spread if Human Genome’s shares surge 15.2% over the current price of $26.49 to exceed the effective breakeven point at $30.525 by January expiration. The call spreader could end up taking home maximum potential profits of $9.475 per contract if the price of the underlying stock jumps 51.0% to trade above $40.00 by expiration day next year. The trader is well positioned to benefit from the rally in HGSI shares that would accompany Benlysta’s approval and/or continued takeover chatter. Another bullish sign that appeared in the same expiry involved put options. It looks like another investor unraveled a previously established bear put spread, selling 2,750 puts at the Jan. 2011 $20 strike and buying the same number of puts at the lower Jan. 2011 $15 strike, to take in a net premium of $1.25 per contract. It is possible the transaction is an opening credit put spread rather than a closing sale, but open interest levels at both strikes are more than sufficient to cover today’s volume. Either way, the trade is another sign of optimism on the biotechnology company ahead of the key drug approval decision. Options implied volatility on the stock is down 14.1% at 137.30% as of 3:30 pm in New York.

BSX – Boston Scientific Corp. – The medical devices manufacturer received a vote of confidence from one medium-term bullish options strategist observed populating February 2011 contract call options this afternoon. Shares in Boston Scientific are currently flat at $6.84 as of 3:10 pm in New York. The investor initiated a ratio call spread, buying 4,000 in-the-money calls at the February 2011 $6.0 strike for a premium of $1.09 each, and selling 8,000 calls at the higher February 2011 $8.0 strike at a premium of $0.21 apiece. The net cost of the transaction amounts to $0.88 per contract and positions the trader to profit should BSX shares trade above the effective breakeven price of $6.88 by expiration day in February. Maximum potential profits of $1.12 per contract pad the investor’s wallet if Boston Scientific’s shares surge 16.95% over the current price of $6.84 to settle at $8.00 at expiration. The sale of twice as many Feb. 2011 $8.0 strike calls results in losses to the trader should shares explode to the upside and exceed the upper breakeven price of $9.12 ahead of expiration day in February.

DFS – Discover Financial Services – Renewed takeover chatter sent shares and implied volatility on the electronic payment services company higher today and inspired some bullish players to scoop up call options in the November and December contracts. Shares in Discover Financial Services are up 1.45% at $18.99 as of 1:35 pm in New York, but earlier rallied as much as 1.9% to touch an intraday- and new 52-week high of $19.07. Investors hoping to see Discover’s shares continue higher in the next week picked up approximately 6,700 calls at the November $19 strike for an average premium of $0.31 a-pop. Call buyers at this strike make money if the credit card issuer’s shares trade above the average breakeven price of $19.31 ahead of expiration next Friday. Optimism spread to the December $19 strike where at least 1,880 calls were coveted for an average premium of $0.72 apiece. Finally, traders purchased approximately 1,000 calls at the higher December $20 strike for an average premium of $0.37 per contract. Investors holding these contracts profit if the price of the underlying stock jumps 7.3% over the current price of $18.99 to exceed the average breakeven point at $20.37 by December expiration. Renewed takeover speculation and rising demand for call options on DFS helped lift the stock’s overall reading of options implied volatility 11.9% to 36.96% as of 1:40 pm.

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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