Option Activity Alert: OEH, GES, TKLC, COH

OEH – Orient Express Hotels, Ltd. – Shares in the hotel and travel company with a taste for the luxury side of the leisure market slipped 2.15% this afternoon to $10.80, but options activity on Orient Express Hotels today suggests shares may rebound by the end of the year. It looks like one optimistic investor purchased a call spread in the December contract to position for the stock to rise as much as 15.7% by expiration. Luxury-goods names such as Coach (COH) and Tiffany & Co. (TIF) are soaring today, perhaps the bullish player populating Orient Express Hotels expects consumers with the funds to afford luxury travel and accommodations to keep their wallets open to the eventual benefit of OEH shares. The trader picked up 5,000 in-the-money calls at the December $10 strike for a premium of $1.90 each, and sold the same number of calls up at the December $12.5 strike at a premium of $0.65 apiece. The net cost of the transaction amounts to $1.25 per contract and positions the investor to profit should shares in Orient Express Hotels rally 4.2% over the current price of $10.80 to surpass the effective breakeven point on the spread at $11.25 by December expiration day. Maximum potential profits of $1.25 per contract are available to the trader in the event that shares jump 15.7% to trade above $12.50 at expiration. Overall open interest on the stock of 13,566 contracts is largely composed of open put positions, while open positions in OEH calls are relatively few and far between. The 10,000 call options traded in the debit call spread today are substantial compared to previously established call positions and against total open positions on the hotel company. Shares in OEH last traded above $12.50 at the beginning of April.

GES – Guess, Inc. – Pre-earnings report alterations to what appeared to be a large bullish bet on the near-term performance of Guess, Inc.’s shares caught our attention on Wednesday. It looked as though one investor initiated a sizable stake in June contract call options last week and yesterday chose to rein in bullish expectations by rolling the position down to a closer-to-the-money strike price. As it turns out, the original position may not have required tailoring because of the huge jump in the price of Guess’s shares post-earnings, but it does seem to have worked to the trader’s advantage. The price of the underlying stock traded as high as $45.49 at the start of the session, but currently stands 11.85% higher on the day at $44.85. Open interest patterns in the June $42 strike calls suggest as many as 15,000 calls may have been purchased for an average premium of $1.64 each between May 20 and May 24. Yesterday 15,000 calls sold at that strike for $0.60 each, and were spread against the purchase of 15,000 fresh calls at the June $40 strike at a premium of $1.24 apiece. Overnight, open interest in the June $42 calls fell substantially, while the June $40 strike calls jumped to top 18,000 positions. The change in open interest suggests the investor may have rolled the $42 calls to the $40 strike ahead of the earnings report. Under these assumptions, it’s Wednesday ahead of earnings, the trader has shelled out roughly $2.28 per contract ($1.64 – $0.60 + $1.24) in premium to wind up with 15,000 calls at the June $40 strike, shares in Guess are down, and it’s anyone’s guess as to the reaction of GES shares following the earnings release. As we all now can see, the stock jumped post-earnings to the benefit of call buyers. The now deep in-the-money calls at the June $40 strike now cost $5.00 each for anyone looking to get long today. Meanwhile, the June $42 strike calls have a hefty price tag of $3.20 each. The investor was well-positioned in holding either the June $40 or June $42 strike calls, but it seems the decision to roll down to the $40 strike, even after factoring in the cost of the alterations, resulted in a more valuable position today.

TKLC – Tekelec – Put players congregating in November contract options on Tekelec appear to be taking bullish stances on the provider of communications network software and systems today. Shares in the name increased as much as 5.5% to $8.89 in early-afternoon trade. Nearly all of the 11,566 option contracts traded on the TKLC thus far in the session are puts with roughly six months left to expiration. It looks like most of the investors driving the volume are selling in- and out-of-the-money puts as high as the November $10 strike and as low as the November $7.0 strike. All of the activity represents fresh positioning given low open interest levels at the strikes. Traders pocketed an average premium of $0.40 per contract on the sale of around 1,000 puts at the November $7.0 strike, and received an average premium of $0.70 apiece on the sale of 2,500 puts at the November $8.0 strike. In-the-money put sellers looked to the higher November $9.0 strike, selling some 2,200 puts to take in an average premium of $1.17 each. Investors sold approximately 2,300 in-the-money puts at the November $10 strike, taking in an average premium of $1.79 per contract, which they keep in full should TKLC’s shares rally 12.5% over the next half of the year to trade above $10.00 at expiration in November. Traders short the puts should benefit given lower levels of implied volatility on Tekelec, and with time erosion of the option premium working in their favor.

COH – Coach, Inc. – Shares in the maker of luxury items ranging from handbags and high heels to totes and ties rallied as much as 4.7% today to touch an all-time high of $63.51. Analysts at JP Morgan raised their share price target on the retailer to $66.00 from $56.00 on Wednesday. Coach was scheduled to present at the Morgan Stanley Retail Conference in Boston yesterday, as well. Bullish traders wasted little time at the start of today’s session digging into options on the handbag maker. Volume in Coach options is hovering just below 18,000 contracts this afternoon, and it looks like call options are trading roughly 1.7 times for each single put option on the stock. Traders expecting shares in COH to secure new all-time highs in the months ahead purchased calls, while investors questioning the likelihood of a continued rally sold calls. Near-term bulls traded more than 2,900 calls at the June $65 strike on open interest of just 349 contracts today. It looks like the majority of the calls were purchased at an average premium of $0.58 a-pop. In-the-money call buying also took place in the June $62.5 strike options where some 1,000 of the calls were picked up for an average premium of $1.45 each. Mixed trading-traffic is apparent in July contract as sellers and buyers drove volume in the July $62.5 strike calls up to 2,900 contracts on open interest of 45 lots. Bulls dominated up at the July $65 strike, however, as some 1,000 calls were purchased at that strike for an average premium of $1.47 apiece. Investors long the July $65 strike calls profit in the event that Coach’s shares rally another 4.7% over today’s high of $63.51 to surpass the average breakeven price of $66.47 by July expiration.

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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