Option Activity Alert: VRGY, AEO, FAST, XLK

VRGY – Verigy Ltd. – A sizable put spread on the maker of chip-testing equipment suggests one option strategist is prepared for shares in Verigy Ltd. to drop ahead of April expiration. Shares in Singapore-based Verigy are currently up 0.85% to stand at $13.03 perhaps after analysts at JPMorgan upgraded the semiconductor sector to ‘constructive’ from ‘cautious.’ Verigy looked to acquire LTX-Credence Corp. back in November in an all-stock deal that valued its takeover target at $500 million including net debt, but those plans may fall through as Japanese chip-testing equipment giant, Advantest Corp., extended its own offer to acquire Verigy at a substantial premium of $15.00 a share, up from an original bid of $12.50 a share, at the end of last year. The merger of Verigy and Advantest would form the largest manufacturer of semiconductor testing equipment in the world. Perhaps the put player populating Verigy today is prepared to see shares in the name drop if the deal with Advantest ultimately falls through in the next six weeks to April expiration. The investor purchased 5,200 puts at the April $13 strike for a premium of $1.00 each, and sold the same number of puts at the lower April $11 strike at a premium of $0.25 apiece. Net premium paid to initiate the spread amounts to $0.75 per contract. Thus, the trader starts making money should Verigy’s shares decline 6.00% to breach the effective breakeven price of $12.25 ahead of April expiration day. Maximum potential profits of $1.25 per contract pad the investor’s wallet in the event that shares in VRGY plummet 15.6% from the current price of $13.03 to trade below $11.00 by expiration next month.

AEO – American Eagle Outfitters, Inc. – Call options on the casual clothing retailer are on trend with bullish options traders this morning ahead of the firm’s fourth-quarter earnings report, which is scheduled for release ahead of the opening bell next Wednesday. The 3.7% rally in AEO shares to an intraday high of $15.57 at the start of the session may have been spurred by yet another bout of renewed takeover chatter. Shares in American Eagle Outfitters are currently up 1.2% to stand at $15.20 as of 11:20am in New York. Calls in the front month are most active today with the firm’s earnings report looming just around the corner. Investors picked up more than 2,100 calls at the March $16 strike for an average premium of $0.48 per contract. Bullish players also looked to the higher March $17 strike to purchase around 1,600 calls at an average premium of $0.24 apiece. Traders long the calls are prepared to profit should shares in AEO rise above the average breakeven prices of $16.48 and $17.24, respectively. Bullish sentiment spread to the April $17 strike where some 1,800 call options were purchased for an average premium of $0.43 each. Call buyers at this strike start making money in the event that American Eagle’s shares surge 14.7% over the current price of $15.20 to surpass the average breakeven point to the upside at $17.43 by April expiration day. Options implied volatility on the stock jumped 12.2% to 51.71% in the first half of the session.

FAST – Fastenal Co. – Shares in the wholesale distributor of industrial and construction supplies are off slightly by 0.15% to stand at $60.48 as of 11:40am, but earlier increased 0.95% to touch an intraday high of $61.15. The firm popped up on our ‘hot by options volume’ market scanner this morning after FAST-bulls scooped up call options in the April contract. Investors positioning for a substantial rally and new all-time highs for Fastenal’s shares by expiration next month may be placing bullish bets to speculate ahead of the company’s first-quarter earnings report on April 12, 2011. More than 4,400 calls changed hands at the April $65 strike on open interest of just 65 contracts. Nearly all of the contracts appear to have been purchased for an average premium of $0.76 a-pop. Call buyers profit if shares in FAST jump 7.5% over today’s high of $61.15 to exceed the average breakeven price of $65.76 by April expiration.

XLK – Technology Select Sector SPDR Fund – Bearish activity in options on the Technology SPDR caught our eye this morning in the face of a 1.4% rise in the price of the fund’s shares to an intra-session high of $26.41. The purchase of a plain-vanilla put spread on the ETF suggests one strategist expects shares to pull back in the months remaining to June expiration. Shares in the XLK, an exchange-traded fund that tracks the performance of the Technology Select Sector of the S&P 500 Index, are currently up 0.60% to arrive at $26.20 just after 12:00pm in New York. The pessimistic player picked up 5,000 puts at the June $25 strike for a premium of $0.73 each, and sold the same number of puts at the lower June $22 strike at a premium of $0.21 apiece. The net cost of the transaction amounts to $0.52 per contract, and positions the investor to make money should shares in the XLK fall 6.6% from the current price of $26.20 to breach the effective breakeven point on the spread at $24.48 by June expiration. Maximum potential profits of $2.48 per contract are available to the put player if shares in the fund plunge 16.0% to trade below $22.00 in the time remaining to expiration day. Shares in the XLK have not traded below $22.00 since mid-September 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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