Option Activity Alert: YHOO, USU, XLK, HGSI

YHOO – Yahoo!, Inc. – The more than 21% correction in the value of Yahoo’s shares since the start of May has one options strategist positioning for a rebound in the price of the underlying by August expiration. Shares in the online media company are down 0.50% today to stand at $14.82 in early-afternoon trade. The bullish options player picked up 7,500 in-the-money calls at the August $14 strike for a premium of $1.41 each, and sold the same number of calls up at the August $18 strike at a premium of $0.18 a-pop. Net premium paid to initiate the spread amounts to $1.23 per contract. Thus, the strategist profits if shares in YHOO rally 2.8% to exceed the effective breakeven price of $15.23 at expiration. Maximum potential profits of $2.77 per contract are available to the call spreader should shares surge 21.5% over the current price of $14.82 to exceed $18.00 at expiration day in August. Yahoo! reports second-quarter earnings after the final bell on July 19. Shares in YHOO last traded above $18.00 back on May 11.

USU – USEC Inc. – Call options on the supplier of low enriched uranium (LEU) for commercial power plants are active this morning, but it looks like the largest transaction in USU options was initiated by an investor taking a bearish stance on the stock. Shares in the Bethesda, MD-based company are down 0.30% to stand at $3.07 just before 12:00pm on the East Coast. The strategist responsible for the bulk of USU options volume today initiated a call credit spread, selling 6,300 calls at the October $4.0 strike for a premium of $0.41 each, and buying the same number of calls up at the October $5.0 strike at a premium of $0.30 apiece. The trader pockets a net credit of $0.11 per contract on the trade. Maximum potential profits of $0.11 per contract, or $69,300, pale in comparison to maximum potential losses faced by the investor of $0.89 per contract, or $560,700, should USEC’s shares soar 62.9% in the next four months to trade above $5.00 at October expiration. The investor does not seem to expect USU to make headlines with a recovery story in the near future, making $0.11 per contract reward enough to bear such risk. Shares in the LEU provider have tumbled 53.2% since January, sliding from a 52-week high of $6.35 down to a new two-year low of $2.97 earlier in the session.

XLK – Technology Select Sector SPDR – Shares in the Technology Select Sector SPDR Fund may remain range-bound through August expiration according to one options strategist who appears to have sold a straddle on the ETF this morning. Shares in the XLK, an exchange-traded fund that tracks the performance of the Technology Select Sector of the S&P 500 Index, are currently up 0.85% to arrive at $24.75 as of 11:15am in New York. It looks like the trader sold 8,000 calls and 8,000 in-the-money puts at the August $25 strike to pocket gross premium of $1.43 per contract. The investor keeps the full amount of premium received on the transaction as long as shares in the XLK settle at $25.00 at expiration in August. The short stance in both call and put options expose the trader to losses should shares in the fund rally above the upper breakeven price of $26.43, or if shares slip beneath the lower breakeven point at $23.57. Subsiding levels of implied volatility on the fund as well as time erosion may benefit the investor by lowering the amount of premium required to buy back the straddle at some point ahead of expiration. Out of the past 175 trading sessions, extending back to mid-October 2010, shares in the XLK have traded within the breakeven prices of $23.57 and $26.43 for approximately 135 of the sessions. The instances when shares in the fund traded outside of the range implied by the straddle were all cases in which the price of the underlying exceeded the upper breakeven share price.

HGSI – Human Genome Sciences, Inc. – Big prints in long-dated call options on the biopharmaceutical company suggest one options strategist may be positioning for the price of the underlying to pop come 2012. Shares in Human Genome Sciences, which received FDA approval to start selling its lupus drug treatment Benlysta in April, are down 0.80% at $24.71 as of 12:50pm in New York. It looks like the investor initiated a debit call spread, buying 10,000 calls at the Jan. 2012 $25 strike for a premium of $3.29 each, and selling the same number of calls up at the Jan. 2012 $30 strike at a premium of $1.47 apiece. Net premium required to initiate the spread amounts to $1.82 per contract, and implies an effective breakeven share price of $26.82 on the position. The trader could rake in maximum potential profits of $3.18 per contract in the event that shares in HGSI surge 21.4% in the next seven months to trade above $30.00 at expiration in January. Open interest in the Jan. 2012 $30 strike call exceeds volume traded at that strike today. It looks like a 10,000-lot Jan. 2012 $30/$35 call spread was initiated back on May 18. It is possible today’s trade represents an adjustment to an existing position, or a fresh bullish stance on Human Genome Sciences. Additionally, a sizable transaction in the underlying shares around the same time the call spread was purchased suggests stock could be tied to the activity in HGSI options. Implied volatility on HGSI ticked up 3.7% this afternoon to 38.20% just before 1:00pm.

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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