Option Activity Alert: RSH, BLK, KBH, GNW

RSH – RadioShack Corp. – A three-legged options combination play on RadioShack today signals long-term bullish sentiment on the consumer electronics goods retailer in addition to the flurry of near-term bullish call activity observed during the session on yet another bout of renewed private equity speculation. Shares in RadioShack are up 1.45% to arrive at $15.34 just before 1:00pm. One options trader looked to the January 2012 contract, selling put options in order to partially finance the purchase of a debit call spread. The trader sold 5,000 Jan. 2012 $12.5 strike put options at a premium of $0.90 each, purchased 5,000 in-the-money Jan. 2012 $15 strike calls for a premium of $2.15 per contract, and sold 5,000 calls at the higher Jan. 2012 $22.5 strike at a premium of $0.25 apiece. The net cost of the three-legged trade amounts to $1.00 per contract. Thus, the investor profits if shares in RadioShack rise another 4.3% over the current price of $15.34 to surpass the effective breakeven price of $16.00 by January expiration. Maximum potential profits of $6.50 per contract are available to the trader should shares in RSH soar 46.7% higher in the next nine months to exceed $22.50 by expiration day in 2012. Selecting the in-the-money $15 strike calls and the deep out-of-the-money $22.50 strike calls positions the investor to benefit from a massive run up in RSH shares should a buyout occur at some point ahead of expiration. Meanwhile, the sale of the $12.50 strike put options lowers the trader’s breakeven point on the upside and allows him to start making money faster if shares continue to move in his favor. The short put options do, however, indicate the trader may wind up having 500,000 shares of the underlying stock put to him at $12.50 each if the contracts land in-the-money and are exercised at expiration. Shares in RadioShack have not dipped below $12.50 since May 2009, but did top $22.50 as recently as October 22, 2010.

BLK – BlackRock, Inc. – The investment management services provider popped up on our scanners at the start of the trading day due to heavier than normal activity in its options. Shares in BlackRock shot up 6.9% to $199.40 today on news it will replace Genzyme Corp. in the S&P 500 Index after the close of trading on April 1. Analysts at Citigroup subsequently added BLK to their Top Picks Live list, reiterated a ‘Buy’ rating on BLK’s shares, and slapped a $240.00 share price target on the stock. One options strategist positioning for shares in the investment management firm to potentially exceed $240.00 by October expiration, initiated a debit call spread on BlackRock this morning. The trader appears to have purchased around 500 calls at the October $220 strike for an average premium of $6.74 each, and sold the same number of calls up at the October $250 strike at an average premium of $1.67 apiece. Average net premium paid to initiate the call spread amounts to $5.07 per contract. The investor responsible for the call spread starts making money if shares in BLK rally another 12.9% over the current price of $199.40 to surpass the average breakeven point on the spread at $225.07 by October expiration. Maximum potential profits of $24.93 per contract pad the investor’s wallet in the event that BlackRock’s shares jump 25.4% to exceed $250.00 in the next seven months to expiration. Shares in BLK traded as high as $243.80 back on January 11, 2010. Overall trading patterns reveal a strong preference for calls, with more than 6.4 call options changing hands on the stock for each single put option as of 12:40pm in New York.

KBH – KB Home – Put volume on the home construction company jumped in the first 20 minutes of the trading day after one strategist initiated a bearish spread in the May contract. Shares in KB Home are currently down 1.6% to stand at $12.73 as of 11:10am in New York. It looks like the put player is positioning for the home building company’s shares to pull back further ahead of April expiration, and perhaps more specifically, for shares to slide after KB Home reveals first-quarter results ahead of the opening bell next Tuesday. Shares in KBH competitor Lennar Corp., fell following its first-quarter earnings report on Tuesday. LEN’s shares extended losses this morning. The investor initiated a debit put spread, buying 4,000 contracts at the May $12 strike for a premium of $0.53 each, and selling the same number of puts at the lower May $10 strike at a premium of $0.11 apiece. Net premium paid to initiate the transaction amounts to $0.42 per contract. The put player starts making money if shares in KB Home fall 9.0% from the current price of $12.73 to breach the effective breakeven point on the spread at $11.58 by April expiration. Maximum potential profits of $1.58 per contract are available to the put-spreader in the event that KBH shares drop 21.4% to trade below $10.00 at expiration. Both strikes at which the spread was initiated had little to no established open positions before today, however, open interest patterns at the May $11/$13 strikes suggests a 4,100-lot put spread was constructed at those strikes on March 25, 2011. Both legs of last week’s spread traded to the middle of the market, but it could have been purchased by a like-minded bearish player positioning for the price of the home builder’s shares to decline in the near term.

GNW – Genworth Financial, Inc. – Options traders looking to benefit from the rise in the insurer’s shares following reports of renewed takeover speculation paid Genworth Financial a visit today. GNW’s shares increased as much as 2.3% during the first half of the session to secure an intraday high of $13.55. Near-term call options are in high demand, with around 22.5 calls changing hands on the stock for each single put option in action today. Investors populating the front month scooped up roughly 3,600 calls at the April $14 strike for an average premium of $0.14 apiece. Call buying spread to the May $14 strike where more than 4,100 calls changed hands on open interest of 992 contracts. Most of the calls were purchased for an average premium of $0.47 a-pop. Traders long the May $14 strike stand prepared to profit in the event that GNW’s shares rally another 6.8% to surpass the average breakeven price of $14.47 by May expiration day. Investors also traded more than 4,000 calls at the higher May $15 strike versus previously existing open interest of just 148 contracts. Options players buying the higher-strike calls paid an average premium of $0.20 each. On average, shares in Genworth would need to jump 12.2% over today’s high of $13.55 by expiration in order for May $15 strike call buyers to break even at a price of $15.20. Options implied volatility on Genworth is up slightly in early-afternoon trade, standing 4.1% higher on the session at 33.33% as of 12:20pm.

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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