Option Activity Alert: DRI, AKS, GRA, GMXR

DRI – Darden Restaurants, Inc. – Options strategists are feasting on near-term call and put options on the operator of eateries such as Red Lobster and Olive Garden ahead of the firm’s second-quarter earnings report, which is scheduled for release before the market opens on Tuesday. Shares in Darden Restaurants rallied as much as 1.6% during the session to touch an intraday high of $50.67. The impending earnings announcement as well as increased demand for options on the stock lifted Darden’s overall reading of options implied volatility 12.0% to 33.20% as of 12:40pm in New York. Investors expecting shares to shatter the current 52-week high of $50.83 by January 2011 expiration scooped up in-the-money call options. It looks like bulls purchased roughly 2,000 now in-the-money calls at the January 2011 $50 strike for an average premium of $1.92 per contract. Call buyers are prepared to profit should shares in Darden Restaurants jump 2.5% over today’s high of $50.67 to surpass the average breakeven price on the calls at $51.92 by January expiration day. Meanwhile, traders wary that shares of the underlying stock may slip following earnings picked up roughly 1,800 puts at the same January 2011 $50 strike for an average premium of $1.76 each. Put buyers at this strike are poised to profit in the event that the restaurant operator’s shares decline 4.8% to trade below the effective breakeven point on the downside at $48.24 by expiration next month.

AKS – AK Steel Holding Corp. – Options activity on the steel producer today suggests one strategist expects shares in AK Steel Holding Corp. to remain range-bound over the next six months to June 2011 expiration. AK Steel’s shares fell as much as 3.4% during the first half of the trading session to touch down at an intraday low of $15.72. The steel maker’s shares rallied sharply at the end of last week, rising 14.3% from Wednesday’s closing price of $14.42 to Friday’s high of $16.48. But, the sale of a strangle in the June 2011 contract today indicates expectations of waning volatility in the price of the underlying, as well as range-bound shares. The investor responsible for the transaction appears to have sold 2,500 calls at the June 2011 $20 strike for a premium of $0.69 apiece, in combination with the sale of the same number of puts at the lower June 2011 $13 strike at a premium of $0.85 each. Gross premium pocketed by the strangle-seller amounts to $1.54 per contract. The trader keeps the full amount of premium received on the transaction as long as AK Steel’s shares trade within the boundaries of the strike prices described through expiration day next year. Reductions in options implied volatility on the stock as well as erosion in the time value incorporated in premium on the contracts may present the trader with opportunities to buy back the short strangle for less than he received for selling the position. But, adverse shifts in AK Steel’s share price could result in losses to the investor. Losses start to amass if the stock rallies above the upper breakeven price of $21.54, or should shares nosedive to trade below the lower breakeven point at $11.46 by expiration day in June. The steel maker’s overall reading of options implied volatility slumped 8.5% lower to stand at 39.07% by 1:00pm. Investors attempting to sell the same June 2011 $13/$20 strangle this afternoon would receive $1.47 per contract, or $0.07 less than the strategist that implemented the position this morning.

GRA – W.R. Grace & Co. – The specialty chemicals company popped up on our ‘hot by options volume’ market scanner this morning after one options strategist initiated a put spread in the February 2011 contract. Shares in W.R. Grace & Co. are currently trading 0.60% lower on the day at $35.50 just before 11:30am in New York after earlier rallying 1.05% to hit an intraday- and new 52-week high of $36.10. The investor responsible for the spread may be utilizing the spread to hedge a long position in the underlying shares, or could be taking an outright bearish stance on the chemicals maker because he sees the stock extending losses over the next couple of months to expiration. The trader picked up 1,580 puts at the February 2011 $35 strike for a premium of $1.65 each, and sold the same number of puts at the lower February 2011 $30 strike at a premium of $0.41 apiece. Net premium paid for the transaction amounts to $1.24 per contract. Thus, the investor makes money, or realizes downside protection, if shares fall 4.90% from the current price of $35.50 to breach the effective breakeven point to the downside at $33.76 ahead of February expiration day. Maximum potential profits of $3.76 per contract are available to the trader should shares in W.R. Grace & Co. plunge 15.5% to trade below $30.00 by expiration next year.

GMXR – GMX Resources, Inc. – At least one investor populating put options on the oil and gas company this morning is taking a bullish stance on GMX Resources. Shares of the Oklahoma City, OK-based firm increased as much as 5.02% at the start of the session to secure an intraday high of $5.44. More than 2,200 puts changed hands at the May 2011 $4.0 strike thus far today, versus previously existing open interest of just 359 contracts at that strike. Nearly all of the put activity at this strike appears to be the work of one trader selling approximately 2,196 of the contracts to receive an average premium of $0.375 apiece. The put seller keeps the full premium pocketed on the transaction as long as GMX Resources’ shares exceed $4.00 through expiration day in May. GMXR shares only dipped below $4.00 once in the past year when the touched down at a 52-week low of $3.98 back on August 24, 2010. The sale of the put contracts indicates the investor is willing to have shares of the underlying stock put to him at an effective price of $3.625 each should the put options land in-the-money at expiration. The trader starts to lose money on the position if shares plunge 33.3% from today’s high of $5.44 to trade below the breakeven price of $3.625 ahead of expiration in May. The overall reading of options implied volatility on GMX Resources is down 10.5% to stand at 59.79% as of 11:50am 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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