Option Activity Alert: ARO, HSY, QLGC, HEK

ARO – Aeropostale, Inc. – Investors are initiating bullish positions on the teen retailer ahead of the company’s first-quarter earnings report on Thursday after the close. Shares in Aeropostale are up 1.25% at $21.41 as of 11:50am, rallying in sympathy with teen apparel company Abercrombie & Fitch Co. following ANF’s better-than-expected earnings report. One options strategist expecting Aeropostale’s shares to extend gains over the next few months sold 9,900 puts at the July $19 strike for a premium of $0.40 each, and purchased the same number of calls up at the higher July $23 strike at a premium of $0.75 apiece. Net premium paid to initiate the bullish play amounts to $0.35 per contract. The trader responsible for the transaction profits at expiration as long as shares in ARO surge 9.1% over the current price of $21.41 to exceed the effective breakeven price of $23.35. Of course, the investor could unravel the position ahead of expiration. He could exit the trade profitably should some catalyst – such as an earnings surprise to the upside – send shares and call premium higher, and put premium lower. The short stance in put options suggests the trader is willing to have shares put to him at $19.00 should the puts land in-the-money at expiration. While the investor runs the risk of having the stock put to him at expiration, it seems the financing received to reduce the cost of buying the calls is worth this risk as ARO’s shares have not traded beneath $19.00 since April 2009. Meanwhile, other bullish players engaged in plain-vanilla call buying, picking up some 3,200 calls at the July $26 strike for an average premium of $0.20 per contract. Call buyers make money if shares in Aeropostale jump 22.4% to top the average breakeven price of $26.20 at expiration in July. The clothing company’s shares were up above $26.20 as recently as April 21, 2011.

HSY – The Hershey Company – News of Hershey Co. CEO David West’s departure from the chocolate company has the market feeling less-than-sweet on the stock today. Hershey’s shares declined as much as 3.9% this afternoon to $54.84 on the news, but some options players are positioning for the stock to pull back further before the week is out. Investors exchanged more than 3,000 now in-the-money puts at the May $55 strike on previously existing open interest of 1,408 contracts. It looks like the majority, or some 1,800 of the puts, were purchased for an average premium of $0.21 a-pop. Traders long the puts profit in the event that Hershey’s shares slip beneath the average breakeven price of $54.79 by expiration on Friday. But, put buyers may Hershey’s-Kiss the $0.21 in premium goodbye if shares settle above $55.00 at expiration. Shares are currently down a lesser 3.65% to stand at $55.00 as of 12:40pm in New York. Premium on the puts is up sharply since this morning given the pullback in the price of the underlying and the 8.4% rise in options implied volatility to 18.88%. Traders paying just $0.21 per contract, on average, this morning could at the present time sell those options for more than twice that amount.

QLGC – QLogic Corp. – Bullish players expecting shares in QLogic Corp. to rise helped themselves to call options on the stock today. The rise in demand for call options on the stock helped lift QLGC’s overall reading of options implied volatility 9.9% to 30.28% this afternoon. Shares in the provider of network infrastructure products increased 1.65% to as high as $17.12 today. Investors traded more than 4,100 calls at the June $17.5 strike against previously existing open interest of just 310 contracts. It looks like most of the calls were purchased at an average premium of $0.35 each. Call buyers are positioned to profit in the event that QLogic’s shares rally another 4.3% over today’s high of $17.12 to surpass the average breakeven price of $17.85 by expiration day in June. Shares in QLGC were trading above $17.85 earlier this month.

HEK – Heckmann Corp. – Shares in the Desert Palm, CA-based bottled water provider rallied as much as 6.1% during the session to secure an intraday high of $5.93. Options activity in the December contract suggests one strategist is positioning for shares to continue to climb this year. It looks like the investor sold 3,000 puts at the December $5.0 strike for a premium of $0.30 each, in order to partially offset the cost of buying 3,000 calls at the same strike at a premium of $1.23 apiece. The net cost of the spread amounts to $0.93 per contract, and leaves the investor with an effective breakeven price of $5.93 on the position. The short position in the put options suggests the trader is willing to have shares of the underlying put to him at $5.00 each should the options land in-the-money at expiration in December.

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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