Option Activity Alert: GAP, SNDK, STI, DFS

GAP – Great Atlantic & Pacific Tea Co., Inc. – Reports suggesting the grocery-store chain operator may file for bankruptcy as soon as this weekend sent shares crashing down by as much as 69.6% to an intraday low of $0.86 today and spurred frenzied trading in call and put options. Meanwhile, investor uncertainty, as measured by GAP’s reading of options implied volatility, skyrocketed along with demand for GAP options, climbing as much as 219.34% to touch a high of approximately 529.40% during the session. The beleaguered New Jersey-based grocer was attacked from all sides right out of the gate this morning by investors scrambling to get a hold of puts and calls in the December and January 2011 contracts. More than 56,980 contracts have changed hands on GAP as of 12:50 pm, which is more than 50% of volume represented by the 112,460 lots of overall previously existing open interest on the stock. Investors concerned that shares may continue to decline purchased more than 2,600 now in-the-money puts at the December $1.0 strike for an average premium of $0.32 apiece. Traders buying these contracts outright may amass maximum potential profits of up to $0.68 per contract, on average, if the grocer’s shares fall to $0.00 ahead of expiration day next Friday. The December $0.50 strike puts were also popular, with some 1,700 contracts purchased for an average premium of $0.14 each. All put action at this strike is new given the open interest reading of zero. Essentially all of the in- and out-of-the-money December contract calls represent fresh positioning, as well. Investors are buying and selling calls in December perhaps to hedge short positions in GAP shares in the case of buyers, or to pocket available premium for sellers of the options. More than 8,100 calls traded at the December $1.0 strike for an average premium of $0.39 apiece. It looks like the majority of the contracts traded to the bid, suggesting many participants expect shares to flounder and the call options to expire worthless a week from today. Puts and calls expiring next month were also popular, but generated far less volume than front-month contracts by 1:00 pm on the final trading day of the week.

SNDK – SanDisk Corp. – Bullish options traders are scooping up in- and out-of-the-money call options on the maker of data storage products this afternoon, with shares in SanDisk Corp. currently up 4.8% to stand at $49.92 as of 1:05 pm. Trading traffic is heaviest at the December $50 strike where more than 10,970 calls changed hands thus far in the session. It looks like the majority of the contracts were purchased at an average premium of $0.70 per contract by investors expecting SNDK shares to hit new 52-week highs ahead of expiration next Friday. Bulls also picked up another 1,250 calls at the higher December $55 strike for an average premium of $0.12 each. Optimism regarding prospects for SanDisk’s shares spread to the January 2011 $55 strike where some 1,600 calls were coveted at an average premium of $0.96 a-pop. Investors buying these contracts are prepared to make money should shares surge 12.3% over the current price of $49.82 to exceed the average breakeven point at $55.96 ahead of expiration day in January. Uber-bulls looked to the higher January 2011 $60 strike to purchase 1,725 call options at an average premium of $0.32 per contract. Rising investor demand for SanDisk call options helped fuel a 14.1% increase in the stock’s overall reading of options implied volatility to 44.60% in the second half of the trading day.

STI – SunTrust Banks, Inc. – One options strategist extended bullish sentiment on SunTrust Banks this morning by rolling a previously established long call stance up to a higher strike price in the January 2011 contract. Shares of the regional financial services firm are up 0.10% to stand at $27.05 as of 11:30 am in New York, but earlier increased as much as 0.85% to touch an intraday high of $27.25. After surveying changes in the level of open interest in calls at the January 2011 $25 strike, it appears the trader originally purchased as many as 10,000 calls at that strike for a premium of $1.39 each on December 2, 2010, when STI shares were trading around $25.37. Today, the investor sold 5,000 in-the-money calls at the January 2011 $25 strike for a much richer premium of $2.66 apiece. Under the assumption that the purchase and sale of the calls is the work of the same individual, net profits on the sale of 5,000 of the calls represented in open interest at that strike amounts to $1.27 per contract. Next, it appears the investor purchased a fresh batch of 5,000 in-the-money call options at the higher January 2011 $27 strike for a premium of $1.41 a-pop. The trader is positioned to make money on the new bullish stance should SunTrust’s shares surge 5.0% over the current price of $27.05 to exceed the effective breakeven point at $28.41 by January expiration day. SunTrust Banks is slated to report fourth-quarter earnings before the market opens on January 21, 2011, which is the same day the calls in the spread expire.

DFS – Discover Financial Services – The credit card issuer and electronic payment services provider popped up on our scanners this morning due to bullish activity in December contract call options. Discover’s shares increased as much as 1.00% at the start of the session to touch an intraday high of $18.96. Call buyers may utilizing the contracts to speculate on potential bullish movement in the price of the underlying stock ahead of- and following the release of- the firm’s fourth-quarter earnings report on December 16, 2010, before the market opens for trading. Investors scooped up approximately 5,000 calls at the December $20 strike for an average premium of $0.15 per contract. Bullish players are prepared to make money should shares in Discover Financial Services rally another 6.3% over today’s high of $18.96 to surpass the average breakeven point to the upside at $20.15 ahead of December expiration. The purchase of the December $20 strike calls also suggests traders hope to see the price of DFS shares exceed the current 52-week high of $19.21 before the options expire next Friday. The sharp rise in demand for calls on Discover helped lift the stock’s overall reading of options implied volatility 8.6% to 37.26% by 11:25 am 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.

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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