RGLD – Royal Gold, Inc. – The gold mining company’s shares are up 3.05% this afternoon to arrive at $60.11, but near-term options activity suggests some strategists are positioning for the price of the underlying stock to pull back ahead of May expiration. Investors may be taking cautious or even pessimistic stances on Royal Gold ahead of the company’s third-quarter earnings report, scheduled for release before the market opens on May 5, 2011. More than 3,400 put options changed hands at the May $55 strike on previously existing open interest of just 519 contracts. It looks nearly all of the puts were purchased for an average premium of $0.35 apiece. Investors are buying low-delta puts, perhaps as a relatively cheap form of near-term downside protection in case of an earnings disappointment or some unforeseen exogenous shock that sends markets, particularly gold mining companies, lower. Traders long the puts make profit at expiration if shares in Royal Gold plunge 9.1% off the current price of $60.11 to breach the average breakeven point at $54.65 by May expiration. Other bearish signals appeared shortly after the put activity took place in the front month. Investors sold approximately 1,500 now in-the-money calls at the May $60 strike to take in net premium of $1.90 per contract. Perhaps call sellers see shares in Royal Gold tapering off and trading below $60.00 at expiration, in which case, traders keep the full amount of premium received on the transaction. Alternatively, traders may be long the underlying, selling covered calls on the stock. Options implied volatility is currently up 5.8% at 27.61% as of 12:50pm in New York.
PENN – Penn National Gaming, Inc. – Shares in the owner and manager of casinos and racetracks surged 7.6% this morning to $40.19, their highest since June 2008, after the company raised its full-year earnings and sales projections. PENN reported better-than-expected first-quarter net income of $0.48 a share on revenue of $667 million ahead of the opening bell on the final trading day of the week. Analysts at KeyBanc raised PENN to ‘Buy’ from ‘Hold’. Investors expecting shares in the gaming company to continue extend gains through June expiration picked up call options. Bulls picked up approximately 1,300 now in-the-money calls at the June $38 strike for an average premium of $2.73 apiece. More than 1,500 calls changed hands at that strike on zero lots of previously existing open interest. Buyers of the contracts profit in the event that PENN’s shares rally above the average breakeven price of $40.73 at expiration in a couple of months. Meanwhile, open interest patterns in May contract calls suggest buyers of the options on Wednesday afternoon are now holding calls that more than doubled in value overnight. It looks like traders positioning for a post-earnings rally purchased around 1,500 calls at the May $38 strike for an average premium of $1.05 each yesterday afternoon. Anyone seeking to buy these calls at the present time would need to cough up $2.70 per contract as of 11:50am in New York. Options implied volatility on Penn National Gaming is currently down 16.0% to stand at 27.60%.
SAP – SAP AG – Signs of bullish sentiment on the software company caught our eye this morning, with shares in SAP AG rising as much as 2.3% to $66.94, the highest share price in more than a decade. The majority of current volume in SAP options involves June contract call and put options, but it looks like these could be closing trades or adjustments to previously established positions initiated back in January. But, fresh prints in May contract calls appears to be the work of an investor buying a call spread ahead of SAP’s earnings report the morning of April 28, 2011. The investor likely purchased around 1,500 calls at the May $67.5 strike for an average premium of $1.16 each, and sold the same number of calls at the higher May $70 strike at an average premium of $0.38 apiece. There are fewer than 85 lots of call open interest at either strike price, suggesting today’s trades are opening positions. Net premium paid to initiate the spread amounts to $0.78 per contract, on average. The options trader starts making money in the event that SAP’s shares rally another 2.0% over today’s high of $66.94, to surpass the average breakeven price of $68.28 by expiration day next month. Maximum potential profits of $1.72 per contract are available to the investor should the software company’s shares jump 4.6% to trade above $70.00 at expiration.
COL – Rockwell Collins, Inc. – Investors expecting shares in the designer of aviation electronics to remain range-bound over the next couple of months appear to be selling strangles in the June contract. Shares in Rockwell Collins are down 1.75% to stand at $62.65 just before 12:25pm in New York. The company reported second-quarter profits of $0.96 a share ahead of the opening bell this morning, which met analyst expectations. Options traders appear to have sold around 1,000 puts at the June $60 strike for an average premium of $1.02 each, and sold roughly the same number of calls up at the June $65 strike at an average premium of $0.82 apiece. Gross premium pocketed on the sale amounts to $1.84 per contract. Strangle-sellers keep the full amount of premium received on the transaction as long as shares in COL trade within the boundaries of the strike prices described through expiration day in June. Strategists also benefit from subsiding levels of implied volatility on the stock and the passage of time. Traders could decide to buy back the options should premiums shift to an advantageous price at some point ahead of expiration. Short stances in both call and put options expose investors to losses should the price of the underlying soar above the upper breakeven price of $66.84, or if shares drop beneath the lower breakeven point at $58.16, at expiration. Options implied volatility on Rockwell Collins is down 16.6% to stand at 17.88% in early-afternoon trade.