Option Activity Alert: SINA, XLF, FRX, OI

SINA – SINA Corp. – Shares of the owner of China’s third-most visited website rallied as much as 8.3% today to hit an intraday high of $61.73 after the company said third-quarter profit jumped 87% on the rise in online advertising revenue. SINA reported third-quarter results after the closing bell on Tuesday night and said it earned $0.48 a share or $31.3 million, which beat average analysts expectations of $26.8 million. Shares surged in U.S. trading even though SINA’s fourth-quarter sales estimate of $103 to $106 million fell short of the average of $109.9 million analysts are expecting. Analysts at Stifel Nicolaus rated SINA Corp. new ‘buy’ with a price target of $75.00, while analysts at Deutsche Bank cut the firm to ‘hold’ from ‘buy’ with a 12-month target share price of $55.00. Shares are currently up 6.05% at $60.44 just before 1:00 pm in New York trading. The majority of options transactions on the stock today appear to be the work of bullish investors positioning for additional short-term gains in the price of the underlying shares. Traders picked up more than 1,250 deep in-the-money calls at the November $57.5 strike for an average premium of $2.41 right out of the gate this morning. Call buyers at this strike are poised to profit should SINA’s shares exceed the average breakeven price of $59.91 through expiration on Friday. Premium on these calls is up sharply since this morning with the bid/ask on the contracts currently at $2.95/$3.20 per contract. Bullish sentiment spread to the higher November $60 strike where another 1,300 in-the-money calls were purchased for an average premium of $1.25 apiece. Traders holding these contracts make money if shares in SINA Corp. rise 1.34% to trade above the breakeven at $61.25 ahead of November expiration. Call options were also active at the higher November $62.5 and $65 strike prices where more than 1,450 contracts changed hands at each strike by 1:05 pm. SINA’s overall reading of options implied volatility plunged 15.7% this afternoon to 47.79% post earnings.

XLF – Financial Select Sector SPDR Fund – A sizeable bullish butterfly spread initiated on the Financial SPDR within the first 30 minutes of the trading session this morning suggests one big options player expects the price of the underlying fund to rebound ahead of January 2011 expiration. Shares of the XLF, an exchange-traded fund that tracks the price and yield performance of the Financial Select Sector of the S&P 500 Index, are currently down 0.35% to stand at $14.71 as of 11:30 am in New York. It looks like the financial sector optimist picked up 20,000 in-the-money calls at the January 2011 $14 strike for a premium of $1.12 each, sold 40,000 calls at the January 2011 $15 strike at a premium of $0.54 apiece, and purchased 20,000 calls up at the January 2011 $16 strike for premium of $0.22 a-pop. Net premium paid to establish the butterfly spread amounts to $0.26 per contract. Thus, the trader is prepared to make money should the fund’s shares exceed the effective breakeven price of $14.26 at expiration. Maximum potential profits of $0.74 per contract or $1.48 million are available to the investor should shares rise up to- and settle at- $15.00 at expiration day in a couple of months. The investor’s profits start to erode in the event that shares of the XLF rise above $15.00, and disappear completely above the upper breakeven price of $15.74. The butterfly-spreader could wind up losing the full $0.26 per contract or $520,000 he paid to initiate the transaction today if shares jump 8.8% over the current price of $14.71 to trade above $16.00 by January expiration.

FRX – Forest Laboratories, Inc. – The maker of branded prescription and over-the-counter drug products popped up on our scanners this morning after a chunk of call options changed hands in the November contract. It looks like the investor behind the trade is taking profits off the table by closing out a previously established position. Shares of the drug manufacturer are up 0.85% this morning to arrive at $32.18 as of 11:45 am. The trader appears to have originally sold 5,000 calls at the November $35 strike for a premium of $0.45 apiece back on October 14, 2010, when shares in Forest Laboratories were on the up-and-up, trading around $33.23. Selling out-of-the-money calls during the rally in FRX shares at the time was, in hindsight, a nice move. The investor was able to buy back all 5,000 contracts today for just $0.05 per contract. The closing purchase results in net profit of $0.40 per contract, or total profits of $200,000. Perhaps the decision to close out the short stance in calls today is a sign the investor sees shares of the drug maker heading higher in the next couple of days before expiration. Options implied volatility on the stock is lower by 5.7% to stand at 25.01% just before midday on the East Coast.

OI – Owens-Illinois, Inc. – Bullish options traders dabbled in December contract put options on the world’s largest manufacturer of glass containers today with shares in Owens-Illinois trading higher by 0.30% to stand at $27.30 as of 12:35 pm in New York. Investors sold approximately 2,800 put options at the December $26 strike to pocket premium of $0.60 per contract. Put sellers keep the full premium received on the transaction as long as the container maker’s shares exceed $26.00 through expiration day. Options traders selling the put contracts do not expect to see shares slide lower ahead of expiration next month, but are willing to have shares of the underlying stock put to them at an average price of $25.40 in the event that the puts land in-the-money by expiration in December. Investors absorb losses on the short put position if OI’s shares fall 6.95% from the current price of $27.30 to trade below the effective lower breakeven point at $25.40.

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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