Option Activity Alert: TPX, SHW, AHD, AU

TPX – Tempur-Pedic International, Inc. – The maker of premium mattresses and pillows popped up on our scanners at the start of the trading session with options activity that’s anything but sleepy. Shares in Tempur-Pedic International jumped 17.6% this morning to secure an intraday- and new all-time high of $59.98 after the company raised its full-year guidance and said it expects to report strong first-quarter results in its announcement after the close on April 20, 2010. The company is expecting to earn $2.80 to $2.95 a share on sales of $1.31 to $1.36 billion for the full year, which is far greater than the average analyst estimate of $2.72 a share on revenue of $1.26 billion. Fresh bullish positions were initiated at the April $60 strike, where more than 2,200 calls changed hands on previously existing open interest of just 8 contracts. It looks like the majority of these calls were purchased for an average premium of $0.50 a-pop, which positions buyers of the contracts to profit above an average breakeven price of $60.50 through expiration next Friday. Investors picked up another 255 calls at the higher April $65 strike for an average premium of $0.10 each. Open interest patterns in the front month suggest some options traders established bullish stances on Tempur-Pedic well in advance of today’s sharp rally in shares. It looks like traders picked up around 630 calls at the April $50 strike for an average premium of $1.64 each back on March 16, 2011. These now deep-in-the-money calls tout an asking price of $9.00 each as of 11:30am in New York. Just one week ago, on April 1, open interest in calls at the April $55 strike suggests some 1,400 call options were purchased for an average premium of $0.15 each. Investors looking to buy those same calls today face an asking price of $4.00 per contract. Analysts at Piper Jaffray reportedly raised their share price target on TPX to $68 from $51 and maintained an ‘Overweight’ rating on the luxury mattress-maker, while analysts at Wedbush upped their price target on the stock to $63 from $49 with an ‘Outperform’ rating.

SHW – Sherwin-Williams Co. – Medium-term options activity on Sherwin-Williams Co. this afternoon paints a bearish picture for the Cleveland, OH-based company’s shares through June expiration. Some investors populating June contract put options may be positioning for the paint and paint products provider’s shares to fall, or are perhaps enlisting downside protection ahead of SHW’s first-quarter earnings report ahead of the opening bell on April 21. Shares in Sherwin-Williams are currently up 0.25% to arrive at $85.51 as of 12:30pm in New York. The stock popped up on our ‘hot by options volume’ market scanner after some 3,000 puts traded at the June $80 strike, on previously existing open interest of just 484 contracts. It looks like most of the put options were purchased for an average premium of $1.50 apiece. Put buyers make money, or realize downside protection, in the event that SHW’s shares drop 8.2% from the current price of $85.51 to breach the effective breakeven point to the downside at $78.50 at expiration. Shares in Sherwin-Williams are hovering just below their 52-week high. Deep out of-the-money put purchasers may be securing pre-earnings announcement downside insurance, and/or hedging any unforeseen shocks that could send the stock lower in the months ahead. Alternatively, put buyers could be outright bearish on the stock, willing to shell out $1.50 per contract because they expect to benefit from a sharp pullback in the price of the underlying ahead of June expiration.

AHD – Atlas Energy LP – Shares in the provider of natural gas gathering services slipped 0.95% to $22.61 in early-afternoon trade, but one options strategist appears to be positioning for the price of the underlying to rally to a new 52-week week high by October expiration. It looks like the investor initiated a ratio call spread, buying 1,000 calls at the October $25 strike at a premium of $1.95 each, and selling 2,000 calls up at the October $30 strike for a premium of $0.70 apiece. Net premium paid to initiate the ratio spread amounts to $0.55 per contract. The options player starts making money if shares in the pipeline operator surge 13.7% over the current price of $22.61 to surpass the effective breakeven point at $25.70 by expiration day. Maximum potential profits of $4.30 per contract pad the investor’s wallet if Atlas Energy LP’s shares jump 32.7% to settle at $30.00 at expiration in October. Selling twice as many of the October $30 strike calls significantly lowered the price at which the bullish player breaks even. However, the added financing also heightens the risk level of the transaction. The trader is exposed to uncapped losses on the upside should shares spike far higher than the investor expects because of the portion of uncovered short calls in the spread. Losses start to accumulate if the stock rises 51.7% and exceeds the upper breakeven price of $34.30 by October expiration day. Shares in Atlas Energy LP last traded above $34.30 back in July 2008.

AU – AngloGold Ashanti Limited – A new record high in the price of gold today sent shares in the South African gold mining company up as much as 2.6% during the first half of the session to an intraday high of $50.77. One options trader expecting AngloGold’s shares to extend gains during the next several months took a bullish stance in July contract calls. The investor initiated a debit call spread, buying 1,000 now in-the-money calls at the July $50 strike for a premium of $3.27 each, and selling the same number of calls up at the July $55 strike at a premium of $1.27 apiece. Net premium paid to initiate the spread amounts to $2.00 per contract. Thus, the gold-bull starts to make money in the event that AU’s shares rally another 2.4% over today’s high of $50.77 to surpass the effective breakeven price of $52.00 by expiration day in July. Maximum potential profits of $3.00 per contract are available to the investor should shares in the global gold company surge 8.3% to trade above $55.00 at expiration. AngloGold’s shares reached a 52-week of $52.86 during trading on November 11, 2010, and have not exceeded $55.00 since May 2006.

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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