Option Activity Alert: PBR, DNR, V, M

PBR – Petroleo Brasileiro SA – The oil producer popped up on our scanners today after one options strategist initiated a bullish butterfly spread using February 2011 contract calls. Shares in the Brazilian oil company are currently up 0.70% this morning to stand at $34.52 as of 11:40am in New York. In the final trading day before the Christmas holiday last week, PBR said it found evidence of oil in an onshore well in the Lagoa Bonita field. It looks like the butterfly-spreader is speculating on a sharp rise in the price of the oil company’s shares ahead of February expiration. The investor scooped up approximately 6,600 calls at the February 2011 $36 strike for a premium of $0.87 each, sold roughly 13,200 calls at the February 2011 $37 strike at a premium of $0.54 per contract, and purchased some 6,600 calls at the higher February 2011 $38 strike for a premium of $0.36 a-pop. The net cost of establishing the spread amounts to $0.15 per contract. Thus, the trader makes money if PBR’s shares rally another 4.7% over the current price of $34.52 to surpass the effective breakeven point at $36.15 ahead of February expiration day. Maximum potential profits of $0.85 per contract are available to the bullish player should shares surge 7.2% to settle at $37.00 by expiration in February. PBR’s overall reading of options implied volatility is higher by 6.8% to arrive at 26.88% as of 11:50am.

DNR – Denbury Resources, Inc. – A substantial buy-write strategy on the oil and natural gas exploration and development company caught our eye this afternoon. Shares in Denbury Resources are trading 0.40% lower on the day at $19.10 just after 1:00pm in New York. It looks like one bullish strategist purchased 470,000 shares of the underlying stock at a price of $19.20 each, and sold 4,700 calls at the March 2011 $20 strike for a premium of $0.75 apiece. The sale of the calls effectively reduces the price at which the investor bought into DNR shares to $18.45 from $19.20, and establishes an exit strategy on the underlying position should the March 2011 $20 strike calls land in-the-money by expiration. The investor responsible for the covered call transaction may enjoy gains of up to 8.40% on the rally in shares from $18.45 to $20.00 if the calls land in-the-money, and the shares are called from him at $20.00 apiece, by expiration day in a few months time. More than 5,320 calls changed hands at the March 2011 $20 strike by 1:10pm, which is substantial compared to the 983 lots of previously existing open interest at that strike.

V – Visa, Inc. – Call options are in high demand at Visa, Inc. today with shares of the global payments technology provider rising as much as 2.4% to an intraday high of $70.37. Visa’s shares are recovering from an 18.65% decline off a six-month high of $81.75 on December 13 to a low of $66.50 on December 17, 2010. Shares of the credit card company, given the intraday high of $70.37, are up 5.8% off the December 17 low of $66.50. Near-term bulls expecting shares to continue to rebound picked up calls and sold out-of-the-money puts this morning. Investors purchased more than 1,800 in-the-money calls at the January 2011 $70 strike for an average premium of $2.00 apiece. Call buyers start to accrue profits in the event that Visa’s shares exceed the average breakeven price of $72.00 ahead of January expiration. Other options optimists shed more than 1,300 puts at the January 2011 $65 strike to pocket premium of $0.44 each. Put sellers may be ditching downside protection they no longer feel is necessary in the near term. Alternatively, traders could be selling the contracts outright to pocket available premium. Investors initiating opening sales of the put options keep the full premium received as long as Visa’s shares exceed $65.00 through expiration day next month. Bullish sentiment spread to the February 2011 $75 strike where some 2,800 calls were picked up for an average premium of $1.50 a-pop. Trading traffic in out-of-the-money calls is heaviest in the March 2011 contract. Investors purchased more than 5,800 call options at the March 2011 $75 strike at an average premium of $2.10 each, and scooped up another 5,900 calls at the higher March 2011 $80 strike for an average premium of $1.28 apiece. Options players buying the March 2011 $75 strike contracts are prepared to profit should shares in Visa, Inc. surge 9.6% to surpass the average breakeven price of $77.10, while March $80 strike call-coveters make money if shares jump 15.5% to trade above the breakeven point to the upside at $81.28 by March expiration. Visa’s overall reading of options implied volatility is up 8.1% at 28.53% as of 12:30pm in New York.

M – Macy’s, Inc. – Shares of the department store operator are currently down 0.40% to arrive at $25.06 just after 12:30pm, after having fallen as much as 2.3% to an intraday low of $24.58 earlier in the session. Heavy snow fall on the East Coast tempered the after-Christmas shopping rush retailers expected to see and weighed down Macy’s, Inc. shares today. But, some options traders are still optimistic on the retailer heading into the New Year. Bullish players hoping to see the department store operator attain a new 52-week high ahead of expiration day in the first month of 2011 scooped up more than 3,400 calls at the January 2011 $26 strike for an average premium of $0.38 each. Call buyers are poised to profit should shares in Macy’s jump 5.3% over the current price of $24.58 to exceed the average breakeven point at $26.38 by expiration day in January. Macy’s overall reading of options implied volatility is up 8.9% to stand at 33.06% as of 12:45pm.

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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