Option Activity Alert: PCX, STI, CSCO, SNDK

PCX – Patriot Coal Corp. – Coal-calls are a hot commodity today with shares in Patriot Coal Corp. soaring 6.85% higher this afternoon to touch an intraday high of $18.71. The fourth-largest eastern U.S. coal producer was rated new ‘market outperform’ with a 12-month target share price of $25.00 at Howard Weil today, and was upped to ‘outperform’ from ‘market perform’ with a 12-month target price of $21.00 at FBR Capital Markets yesterday, on optimism regarding economic recovery. Investors positioning for Patriot’s shares to continue their run picked up more than 5,300 calls at the January 2011 $19 strike for an average premium of $0.70 each. Call buyers start making money if Patriot Coal’s shares surge 5.3% over today’s high of $18.71 to exceed the average breakeven price of $19.70 by January expiration. The surge in demand for call options on the stock helped lift Patriot’s overall reading of options implied volatility 7.7% to 49.32% by 12:40pm.

STI – SunTrust Banks, Inc. – The financial services firm popped up on our scanners this morning after one options strategist initiated a sizeable ratio put spread in the February 2011 contract. Shares in SunTrust Banks surged 3.95% during the first half of the session to secure an intraday high of $28.12. STI was rated new ‘outperform’ with a 12-month target share price of $31.00 at RBC Capital Markets on Monday. The put action observed on the banking company may be the work of an investor hedging a long position in the underlying shares, or could be an outright bearish player expecting STI’s shares to falter in the first couple of months of the new year. The investor picked up 4,000 puts at the February 2011 $27 strike for a premium of $1.25 each, and sold 8,000 puts at the lower February 2011 $23 strike at a premium of $0.26 a-pop. Net premium paid to establish the spread amounts to $0.73 per contract. Thus, the trader stands ready to profit if SunTrust’s shares fall 6.6% from today’s high of $28.12 to breach the effective breakeven point to the downside at $26.27 by expiration day in February. Maximum potential profits of $3.27 per contract are available to the trader should shares in SunTrust plunge 18.2% to settle at $23.00 at expiration. The sale of twice as many of the lower strike puts is an effective way to reduce the cost of buying up downside protection, and suggests the investor responsible for the transaction does not expect to see shares collapsing much below $23.00 ahead of expiration. Catastrophic declines in SunTrust’s shares could, however, result in losses to the put player if the stock falls 29.8% off the intraday high of $28.12 to breach the lower breakeven price of $19.73 before the options expire in February.

CSCO – Cisco Systems, Inc. – It looks like some options strategists foresee brighter days ahead for the maker of switches and routers. One optimistic player appears to have employed a three-legged bullish trade, selling a put spread in order to buy out-of-the-money calls in the April contract. Shares in Cisco Systems are down slightly by 0.15% this afternoon to stand at $19.59 as of 12:45pm in New York. Cisco’s shares are still down 20.0% since November 10, 2010. The investor positioned for a rebound by selling 1,375 in-the-money puts at the April 2011 $21 strike for a premium of $1.88 each, buying the same number of puts at the lower April 2011 $19 strike at a premium of $0.82 apiece, and buying 1,375 calls at the April 2011 $21 strike for a premium of $0.60 a-pop. The trader pockets a net credit of $0.46 per contract on the spread, and adds to profits if CSCO’s shares rally 7.2% over the current price of $19.59 to trade above $21.00 by expiration in April. The put spread exposes the trader to maximum potential losses of $1.54 per contract should shares of the networking company slip below $19.00 ahead of expiration day next year. But, the risk appears to be worth it for this trader because of the uncapped upside exposure provided by the long calls as well as the $0.46 net credit pocketed on the transaction.

SNDK – SanDisk Corp. – Call options on the maker of data storage products are flying off the shelves today with shares in SanDisk Corp. rallying as much as 5.10% to hit a new three-year high of $51.72. Investors hoping to see the good times continue scooped up January 2011 contract call options on SanDisk, which was upgraded to ‘outperform’ from ‘market perform’ at Raymond James. Bulls picked up more than 1,800 now in-the-money calls at the January 2011 $50 strike for an average premium of $2.67 apiece. Traders holding these contracts are poised to profit should SanDisk’s shares increase another 1.8% over today’s high of $51.72 to surpass the average breakeven price of $52.67 by January expiration day. Trading traffic in SanDisk Corp. call options is heaviest at the higher January 2011 $55 strike where more than 8,100 calls have changed hands as of 12:05pm in New York. It looks like the majority of the contracts, approximately 4,800 calls, were bought by bullish players for an average premium of $0.93 apiece. Call buyers at this strike make money if SNDK’s shares surge 8.1% to exceed the average breakeven point to the upside at $55.93 by expiration day next month. Options implied volatility on SanDisk is higher by 8.4% in early afternoon trade to arrive at 37.47% by 12:10pm.

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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