Option Activity Alert: NSM, MED, AMD, AEM

NSM – National Semiconductor Corp. – Call options on the manufacturer of semiconductor products are in high demand this morning on reports of renewed takeover speculation and the more than 4.9% rally in the price of the underlying shares to an intraday high of $15.79 by 12:25pm. NSM is slated to report earnings for the third quarter after the closing bell on March 10, 2011. More than 3,600 calls have changed hands at the March $16 strike, with roughly equal numbers of the contracts hitting the bid as the ask, which suggests buyers and sellers are active at this strike. Bulls appear to be dominating activity elsewhere in National Semiconductor options, with roughly 1,000 calls having been purchased up at the March $17 strike for an average premium of $0.14 apiece. Volume is heaviest in April contract out-of-the-money call options. Investors purchased the majority of some 4,900 calls at an average premium of $0.51 a-pop at the April $16 strike today on open interest of just 25 contracts. Call buyers at this strike are poised to profit should shares in NSM rally another 4.9% to surpass the average breakeven price of $16.51 by April expiration day. Fresh call buying activity was also observed at the April $17 strike, as well as at the May $17 strike, during the first half of the session. Options implied volatility on NSM is currently up 11.4% to stand at 36.32% just before 12:30pm in New York.

MED – Medifast, Inc. – Shares in the maker of weight management products shed 12.0% this morning to touch down at an intra-session low of $22.19 following disappointing earnings from competitor NutriSystem, Inc. NTRI’s shares dropped 31.2% today to a fresh 52-week low of $13.90 post-earnings. Medifast’s earnings are just around the corner, with the report scheduled for release ahead of the opening bell on March 3, 2011. Despite the gloomy forecast out of NutriSystem, it looks like one investor is positioning for a more positive outcome from Medifast. The contrarian player appears to have purchased a debit call spread, buying 1,000 calls at the April $23 strike for an average premium of $2.19 each, and selling the same number of calls at an average premium of $0.99 apiece. The net cost of the bullish play amounts to $1.20 per contract and positions the trader to make money should MED’s shares bounce back up by around 9.0% to surpass the average breakeven point at $23.20 ahead of April expiration. Maximum potential profits of $1.80 per contract are available to the call-spreader if shares in Medifast rally 17.2% off today’s low of $22.19 to trade above $26.00 before the calls expire in April. The rise in demand for MED options helped lift options implied volatility on the stock 12.0% to 80.16% in early afternoon trade.

AMD – Advanced Micro Devices – A sizeable stock and options combination play on Advanced Micro Devices caught our eye this morning. It looks like one strategist initiated a delta neutral position on AMD in the July contract. Shares in the name are up 3.3% to arrive at $9.40 as of 12:50pm. The investor appears to have sold 319,000 shares of the underlying at a price of $9.34 each, and purchased 7,250 calls at the July $10 strike for a premium of $0.81 each, on a 0.44 delta. The trader benefits from the short stock leg of the transaction if shares decline, but makes out on the long calls if shares continue their upward trajectory in the next five months to expiration. The global semiconductor company reports earnings for the first quarter after the market closes on April 14, 2011. Elsewhere in AMD options, investors are displaying a marked preference for calls over puts. Options players are trading more than 3 calls on AMD for each single put option in action as of 1:00pm in New York.

AEM – Agnico-Eagle Mines Ltd. – Bullish players picked up call options on the gold mining company straight out of the gate this morning with shares in the Toronto, ON-based firm increasing as much as 2.05% during the session to hit an intraday high of $70.18. Investors hoping to see the uptrend extend through to expiration next month purchased more than 1,250 calls at the March $75 strike for an average premium of $0.72 per contract. Buyers of these call options profit should shares in the mining company surge 7.9% to exceed the average breakeven price of $75.72 within the time remaining to expiration. Traders itching for a more substantial rally in the price of the underlying shares targeted their efforts in April contract calls. More than 4,200 call options changed hands up at the April $80 strike on paltry previously existing open interest of just 325 contracts. It looks like the majority of these calls were scooped up by bullish players for an average premium of $0.79 a-pop. Investors holding these contracts make money in the event that AEM’s shares jump 15.1% to trade above the average breakeven price of $80.79 by April expiration. Shares in Agnico-Eagle last traded above $80.00 in mid-December, with the stock slipping in the months since it reached its 52-week high of $88.20 on December 7, 2010.

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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