Option Activity Alert: PEET, EWJ, ENDP, CVC

PEET – Peet’s Coffee & Tea, Inc. – Investors are constructing bullish positions on Peet’s Coffee & Tea today with shares in the name up 4.15% at $47.91 in early-afternoon trade. Speculation that Starbucks may be interested in acquiring Peet’s Coffee inspired a flurry of options activity on the stock following a DealReporter article regarding discussions between the two companies. It looks like one or more investors are buying call spreads in the June contract to position for shares to spike to a new all-time high ahead of expiration. Investors picked up around 1,000 calls at the June $50 strike for an average premium of $3.65 each, and sold the same number of calls up at the June $55 strike for an average premium of $1.90 apiece. Net premium paid to initiate the spreads amounts to $1.75 per contract. Traders employing this strategy are poised to profit should PEET’s shares surge 8.0% over the current price of $47.91 to exceed the average breakeven point at $51.75 by June expiration. Call spreaders pocket maximum potential profits of $3.25 per contract if the share price jumps 14.8% to trade above $55.00 before the contracts expire in a few months. More than 3,300 option contracts have changed hands on Peet’s Coffee & Tea thus far in the session, which is sizable in comparison to overall open interest on the stock of 5,204 contracts. Investors are favoring calls on the stock, trading more than 11 calls for each single put option in play this afternoon.

EWJ – iShares MSCI Japan Index ETF – Investor demand for options on the Japan ETF remains strong today with the price of the underlying fund pulling back during the session as the nuclear crisis and aftermath of Friday’s earthquake and subsequent tsunami continue to unfold. Shares in the EWJ, an exchange-traded fund that tracks the performance of the Japanese equity market, fell as much as 5.5% earlier today to $9.48. More than 405,650 option contracts have changed hands on the ETF as of 12:50pm in New York. Overall open interest on the EWJ has grown by leaps and bounds since the earthquake. Overnight, open interest jumped from around 800,000 open positions to more than 1.3 million. One bearish player positioning for further weakness in the fund’s shares initiated a put butterfly spread today. It looks like the trader purchased 13,600 puts at the April $9.0 strike for a premium of $0.28 each, sold 27,200 puts at the April $8.0 strike at a premium of $0.11 apiece, and purchased 13,600 puts at the lower April $7.0 strike for a premium of $0.05 a-pop. The net cost of the put ‘fly play amounts to $0.11 per contract, and positions the trader to make money should shares in the fund fall another 6.2% off today’s low of $9.48 to breach the effective breakeven price of $8.89 by expiration next month. Maximum potential profits of $0.89 per contract pad the investor’s wallet if shares in the EWJ plunge 15.6% to settle at $8.00 at expiration. Shares in the fund have not traded below $9.00 since May of 2009.

ENDP – Endo Pharmaceuticals Holdings, Inc. – Call activity on the maker of branded and generic prescription drugs this morning suggests one strategist expects shares in Endo Pharmaceuticals are unlikely to rally much ahead of April expiration. ENDP’s shares are currently down 1.75% to stand at $33.85 as of 11:20am in New York. The pessimistic player appears to have sold a call spread, taking in and keeping the credit on the transaction as long as shares in Endo fail to break above $35.00 through expiration day next month. It looks like the investor sold 2,000 calls at the April $35 strike for a premium of $1.33 each, and purchased the same number of calls at the higher April $40 strike at a premium of $0.33 apiece. The investor pockets a net credit of $1.00 per contract on the spread, and retains the full amount of premium as long as the April $35 strike calls expire worthless at expiration. The bearish play limits losses to the upside with the purchase of the higher-strike call options, but the investor will start to lose money if the price of the underlying exceeds the effective breakeven price of $36.00 ahead of expiration. The credit spread could result in maximum potential losses of $4.00 per contract in the event that ENDP’s shares surge 18.2% to trade above $40.00 by expiration in April.

CVC – Cablevision Systems Corp. – Investors initiated bearish positions in Cablevision options this morning with shares in the U.S. cable operator trading 0.95% lower on the session to arrive at $34.58 just before 11:40am. Traders appear to be replicating strategies employed on CVC in the front month during trading on Tuesday. More than 2,850 calls at the March $35 strike sold for an average premium of $0.23 per contract today. Open interest patterns at that strike suggest investors received $0.32 premium on the sale of some 2,500 of the calls yesterday. Call sellers keep the premium pocketed on the trade as long as shares in Cablevision trade below $35.00 through expiration at the end of the week. If the calls sold at that strike this morning and on Tuesday are uncovered, investors amass losses in the event that shares in CVC reverse course to surpass the breakeven prices of $35.23 and $35.32, respectively.

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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