Option Activity Alert: BA, CSCO, TIN, TEVA

BA – Boeing Co. – Boeing’s shares may be headed for the stratosphere or ready to crash and burn over the next few months according to the buyer of a sizable long strangle on the producer of commercial jetliners today. Shares in the Chicago, IL-based company are up 0.90% at $76.27 in early-afternoon trade, recovering up from earlier losses following disappointing April durable goods data. The strangle-strategist it seems is at least looking for implied volatility on the stock to climb if not the actual price of the underlying shares. The trader purchased approximately 7,500 calls at the August $85 strike for a premium of $0.56 each, and purchased the same number of puts at the August $65 strike at a premium of $0.88 a-pop. Net premium paid to initiate the strangle amounts to $1.44 per contract, thereby preparing the trader to make money should the stock swing sharply in either direction away from the current price. Profits are available on the upside at expiration if the stock is trading above the upper breakeven point at $86.44, while profits on the downside require shares trade below the lower breakeven point at $64.56 at expiration. Boeing’s shares would need to jump 13.3% higher, or drop 15.4%, from the current price to break-out of either point in the next few months. But, as mentioned previously, the stock need not move at all for the buyer of the strangle to benefit from the position. What is required are rising expectations of turbulent days ahead for BA’s shares, in other words, higher implied volatility. The combined value of the call and put options should increase if implied volatility on Boeing climbs going forward. The investor may be able to sell the strangle ahead of expiration for more than the $1.44 per contract required to purchase the position today given favorable moves in the level of volatility on the stock. Boeing reports second-quarter earnings on July 27 ahead of the opening bell, and well ahead of the options’ August expiration date. Implied volatility on BA currently stands 5.4% lower on the session at 21.43% as of 1:00pm in New York.

CSCO – Cisco Systems, Inc. – Shares in the world’s largest maker of networking equipment are down 0.80% this morning to stand at a new 52-week low of $16.14 after the company left its fourth-quarter revenue forecast for relatively flat sales unchanged. It looks like at least one strategist populating Cisco options today is hoping the company’s projection for fourth-quarter sales is too conservative. The investor appears to have initiated a one-by-three ratio call spread on the stock to position for limited bullish movement in the price of the underlying by September expiration. The call options utilized in the transaction expire roughly 5 weeks after Cisco’s fourth-quarter earnings announcement on August 11, 2011. The trader picked up 4,000 in-the-money calls at the September $16 strike for a premium of $1.01 per contract, and sold 12,000 calls up at the September $19 strike at a premium of $0.13 apiece. Net premium paid to put on the spread amounts to $0.62 per contract. Thus, the options player may profit in the event that Cisco’s shares rally 3.0% over the current price of $16.14 to surpass the effective breakeven point at $16.62 by September expiration. Maximum potential profits of $2.38 per contract are available to the investor should shares surge 17.7% to settle at $19.00 at expiration. Another earnings disappointment from the company could result in the full loss of the $0.62 in premium paid for the ratio spread. The ratio of three short calls for each long implies significant risk of losses to the upside should the stock rise far more than the trader anticipates come expiration day.

TIN – Temple-Inland, Inc. – Large prints in long-dated call options on the manufacturer of corrugated packaging materials suggests one trader has his or her eye on a new 52-week high for the stock by January 2011 expiration. Shares in Temple-Inland rose as much as 0.93% today to $22.81. The bullish tactic selected for the position, a debit call spread, involved the purchase of some 6,425 calls at the Jan. 2012 $25 strike for a premium of $1.50 each, and the sale of the same number of calls at the higher Jan. 2012 $30 strike at a premium of $0.40 apiece. Net premium required to buy the spread amounts to $1.10 per contract, and prepares the trader to profit should Temple-Inland’s shares surge 14.4% to exceed the effective breakeven price of $26.10 by expiration next year. TIN’s shares secured a 52-week high of $26.20 back on February 18. Maximum potential profits of $3.90 per contract pad the investor’s wallet in the event that shares jump 31.5% over the next 8 months to trade above $30.00 at expiration. Shares in TIN last topped $30.00 in December 2007.

TEVA – Teva Pharmaceutical Industries, Ltd. – Call activity on the producer of branded and generic drugs suggests one long-term bullish player is positioning for shares in the pharmaceuticals company to near- and potentially surpass- its highest price of the past 52 weeks. Teva’s shares had turned positive this morning, but have slipped slightly and are nearly flat on the day at $49.38 as of 11:55am. The options trader hoping to see the stock rally into next year employed a ratio call spread in the January 2012 contract, buying 2,800 calls at the Jan. 2012 $52.5 strike for a premium of $2.22 each, and selling 5,600 calls up at the Jan. 2012 $62.5 strike at a premium of $0.40 apiece. The net cost of initiating the spread amounts to $1.42 per contract and positions the investor to make money should Teva’s shares increase 9.2% over the current price of $49.38 to trade above the effective breakeven point on the spread at $53.92 by January expiration. The drug maker’s shares last traded above $53.92 in February. The bullish player could rake in maximum potential profits of $8.58 per contract on the spread given a 26.6% surge in TEVA’s shares to $62.50 at expiration next year. Shares in the Israel-based company have not traded around the $62.50-level since April 2010.

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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