Option Activity Alert: HNR, ESI, XHB, FII

HNR – Harvest Natural Resources, Inc. – News Harvest Natural Resources discovered oil off the coast of Gabon sent shares in the Houston, TX-based company up as much as 29.0% to an intraday high of $13.56. The sharp rally in the price of the underlying on the reports spurred bullish plays in Harvest’s options this morning. Shares are currently up a lesser 12.65% at $11.83 as of 12:25pm on the East Coast. Options players purchased roughly 1,600 calls at the June $12.5 strike for an average premium of $0.54 each. The call options were in-the-money earlier in the session, but are now trading out-of-the-money as the rally has cooled somewhat. Investors long the calls are poised to profit should shares in HNR increase 10.2% over the current price of $11.83 to surpass the average breakeven point to the upside at $13.04 by expiration on Friday. Like-minded bulls seeking a longer-term run-up in the price of the shares picked up roughly 1,000 calls at the September $12.5 strike for an average premium of $2.09 a-pop. Call buyers at this strike make money if shares in Harvest Natural Resources surge 23.3% to trade above the average breakeven price of $14.59 by September expiration. Options implied volatility on Harvest stands 9.8% higher on the session at 82.44% just after 12:30pm in New York.

ESI – ITT Educational Services, Inc. – Shares in the for-profit provider of degree programs in the U.S. rallied nearly 2.0% this morning to touch an intraday high of $83.74 after analysts at Piper Jaffray raised their share price target on the stock to $84.00 from $75.00. Despite the rise in shares of ITT Educational Services today one options strategist is positioning for the price of the underlying to drop sharply ahead of June expiration. The near-term bearish player initiated a debit put spread, buying some 2,750 puts at the June $77.5 strike for a premium of $0.59 each, and selling the same number of puts at a premium of $0.09 apiece. Net premium paid to initiate the put spread amounts to $0.50 per contract. The investor profits if shares in ITT Educational Services fall 8.05% from an earlier high of $83.74 to breach the effective breakeven price of $77.00 at expiration. Maximum potential profits of $4.50 per contract are available to the put spreader should shares in ESI plunge 13.4% to trade below $72.50 at expiration at the end of the week. The rise in demand for put options on the stock helped lift the overall reading of options implied volatility on ESI 3.6% to 49.04% as of 11:30am in New York.

XHB – SPDR S&P Homebuilders ETF – A large transaction in July contract call options on the Homebuilders ETF suggests one strategist is preparing for a rebound in the price of the underlying fund through expiration next month. Shares in the XHB, an exchange-traded fund that replicates the performance of the S&P Homebuilders Select Industry Index, increased as much as 0.90% during the first half of the session to secure an intraday high of $17.23. The fund’s holdings include companies such as Bed Bath & Beyond, Inc., Tempur-Pedic International, Inc., and Toll Brothers, Inc. An investor positioning for shares in the XHB to continue to move higher purchased 10,000 in-the-money calls at the July $17 strike for a premium of $0.59 apiece. The trader makes money if shares in the fund rally another 2.1% over today’s high of $17.23 to exceed the effective breakeven price of $17.59 by expiration day in July. Shares in the fund tumbled 10.4% in the past couple of weeks, having traded up at $18.91 on May 31, down to a 6-month low of $16.95 this past Friday.

FII – Federated Investors, Inc – The provider of investment management and financial services popped up on our ‘hot by options volume’ market scanner this morning due to heavier than usual trading traffic in long-dated put options. Shares in Federated Investors are slightly lower in early-afternoon trade, standing 0.20% lower on the day at $24.10 as of 12:40pm in New York. It looks like some 4,200 puts changed hands at the January 2012 $20 strike against paltry previously existing open interest of just 16 contracts. The majority of the puts appear to have been purchased at a premium of $1.10 apiece. The investor or investors driving the volume are positioned to profit should shares in FII plunge 21.6% from the current price of $24.10 to breach the breakeven point on the downside at $18.90 by expiration day in January. Shares in Federated Investors, Inc. last traded beneath $18.90 back in March 2009. Second-quarter results from the company are scheduled for release after the final bell on July 21, 2011.

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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