Option Activity Alert: RIMM, CVS, CALL, JEC

RIMMResearch In Motion, Ltd. – Shares in the BlackBerry smart phone and PlayBook tablet maker slipped today on news that a class action lawsuit alleging RIMM misled investors has been filed in the U.S. against the Canadian company. The past couple of months have seen the value of the stock drop as much as 40.0% off a mid-February 52-week high of $70.54. RIMM’s revised outlook at the end of April for lower-than-previously anticipated earnings and revenue helped accelerate the stock’s pullback.

Though headwinds against a RIMM-rebound are strong at present, it looks like some options strategists are positioning for a sharp recovery in the price of the underlying stock by January 2012 expiration. Shares in the smart phone maker pared earlier losses but remain flat on the session at $43.57 as of 11:50am in New York. Investors appear to have initiated bullish call butterfly spreads, buying roughly 1,500 calls at the Jan. 2012 $65 strike, selling some 3,000 calls at the Jan. 2012 $70 strike, and purchasing approximately 1,500 calls at the Jan. 2012 $75 strike, all for an average net premium of $0.16 per contract.

The relatively cheap long-term bullish bet on a recovery story for RIMM could result in substantial profits, but the stock would need to soar 60.1% to $70.00 at expiration next year in order for call ‘fly players to bank maximum potential profits of $4.84 per contract. The parameters of the spread are such that maximum potential losses are limited to the premium paid, or roughly $0.16 per contract. Traders may very well lose the full $0.16 in premium come expiration, but it seems the prospect of potentially raking in 30 times as much is, according to these call ‘fly buyers, worth the risk. The BlackBerry provider reports first-quarter earnings after the final bell tolls on June 16.

CVSCVS Caremark Corp. – Options players flocked to CVS straight out of the gate this morning on reports the largest U.S. provider of prescription drugs won a $3 billion contract for Blue Cross Blue Shield’s Federal Employee Program. Shares in CVS rallied as much as 3.5% on the news to touch an intraday- and new two-year high of $39.50. Investors positioning for additional new highs for the stock in the near term purchased calls in the front month. It looks like more than 8,300 calls changed hands at the June $40 strike so far today on open interest of 978 contracts.

Buyers of the options are more prevalent than sellers and paid an average premium of $0.36 per contract to position for the stock to extend gains through June expiration. Call buyers profit in the event that CVS Caremark Corp.’s shares rally another 2.2% over today’s high of $39.50 to surpass the average breakeven price of $40.36 by expiration day next month. Bulls also targeted the June $41 strike, buying nearly all of the 591 calls exchanged at that strike today for an average premium of $0.15 per contract.

Meanwhile, one strategist populating the July contract options appears to be taking a different approach. It looks like the trader sold the 600-lot July $38 put / $40 call strangle to pocket gross premium of $1.31 per contract. The investor responsible for the transaction keeps the full amount of premium as long as shares trade within the boundaries of the strike prices described through expiration day in July.

The short strangle takes advantage of the rise in options implied volatility on the stock today, which currently stands 7.1% higher at 19.15% as of 1:10pm. Subsiding levels of implied volatility should work in the strangle-seller’s favor along with erosion of time value priced into premiums. The trader could buy back the strangle at an advantageous price ahead of expiration, or hold the position to potentially walk away with all $1.31 per contract in premium should the calls and puts expire worthless at expiration day. The short strangle implies risk of loss above an upper breakeven share price of $41.31, or below the lower breakeven point at $36.69. More than 46,500 option contracts have changed hands on CVS so far this afternoon.

CALLmagicJack VocalTec Ltd. – The provider of voice over IP formerly known as VocalTec Ltd. up until its March 2011 name-change attracted heavier than normal trading in its call options today. Shares in the Netaya, Israel-based company increased as much as 10.5% to an intraday high of $27.36 earlier today, but have since retreated to stand just 0.75% higher on the session at $24.95. Investors eyeing magicJack options picked up around 2,500 calls at the June $25 strike for an average premium of $2.16 each. Open interest of 3,824 contracts at this strike is sufficient to cover the 3,406 June $25 strike calls exchanged thus far in the session.

The existing positions were likely initiated back in January, and interestingly, the only other strikes with comparable open positions – the June $17.5 and $20 strike puts – were established at roughly the same time of the year. Overall open interest on the stock stands at 10,491 contracts today. If investors are buying-to-open long call positions on magicJack VocalTec, the option positions them to make money should shares surge 8.9% over the current price of $24.95 to exceed the average breakeven price of $27.16 by expiration day next month.

JECJacobs Engineering Group, Inc. – The provider of a range of technical, professional and construction services to industrial, commercial and governmental clients popped up on our scanners this morning due to fresh positioning in call and put options in the front month. Shares in Jacobs Engineering Group rose 1.9% to an intraday high of $45.78 today. Puts and calls are active, but it looks like traders are mostly buying calls and selling puts on the stock. Some 2,000 puts sold at the June $44 strike at a premium of $0.65 each, while around 1,500 calls were purchased at the June $45 strike for around $1.40 in premium apiece.

Put sellers keep the full amount of premium received today as long as shares in Jacobs exceed $44.00 through June expiration. Investors long the June $45 strike calls stand prepared to profit should the price of the underlying stock increase 1.4% over today’s high of $45.78 to exceed the average breakeven price of $46.40 at expiration. Shares in JEC closed above $46.40 as recently as last week.

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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