Option Activity Alert: ADM, ETFC, VG, XLNX

ADM – Archer-Daniels-Midland Co. – A couple of weeks ago demand for call options on one of the world’s largest processors of corn, wheat, cocoa and other feedstuffs jumped after Warren Buffet said Archer-Daniels-Midland is the “kind of company we look at” in regards to the search for acquisition candidates. Today, ADM options appear to be popular with at least one strategist positioning for further upside movement in the price of the underlying shares through the end of 2011. Shares in the food products company increased as much as 1.4% this morning to $31.00 by 11:30 am in New York. The stock still trades at an 18.5% discount off its more than 3-year high of $38.02 attained in February. Bullish action in ADM options and the bump-up in shares follow a study released by Purdue University economists on Tuesday showing, among other things, that high food prices are expected to persist for the next one to two years. The U.S. government in February said U.S. farm income may reach $94.7 billion this year. Archer-Daniels-Midland is scheduled to report fourth-quarter earnings ahead of the opening bell on August 2. One options trader expecting shares to near multi-year highs by December expiration initiated a three-legged bullish transaction straight out of the gate this morning. It looks like the investor sold 1,000 puts at the December $28 strike for a premium of $1.16 each in order to finance the purchase of a 1,000-lot December $32/$36 call spread at a cost of $1.14 apiece. The sale of the put options more than offset the cost of the bull call spread, thereby yielding a net credit of $0.02 per contract to the investor. The trader adds to his gains in the event that shares in ADM rally another 3.2% over the current price of $31.00 to surpass the effective breakeven price of $32.00 at expiration. Maximum potential profits of $4.02 per contract, including the net credit received, are available to the investor should shares in the feedstuffs producer jump 16.1% to trade above $36.00 at expiration day in December. Shares in ADM last traded above $36.00 at the beginning of May.

ETFC – E*Trade Financial Corp. – Shares in the provider of online brokerage and banking services rallied some 17.6% during the session to $15.23, helping ETFC shares recover somewhat from the more than 30% correction in the price of the underlying since mid-February. At today’s high of $15.23, the stock stands 94% lower than ETFC’s pre-recession level besting $260.00 a share back in January 2007. E*Trade’s shares increased this morning after its largest shareholder, Citadel LLC, requested the online retail broker remove two of its directors and hold a special meeting of the company’s shareholders to discuss options that could include putting E*Trade up for sale. Citadel’s comments to E*Trade spurred frenzied options activity on the online broker, adding to demand for options ahead of ETFC’s second-quarter earnings report after the final bell tolls this afternoon.

Bullish speculators scooped up call options on ETFC, buying around 3,000 calls at the September $15 strike for an average premium of $1.10 each. Call buyers at that strike profit if shares in E*Trade rally another 5.7% over today’s high of $15.23 to surpass the average breakeven price of $16.10 by expiration in September. August $15 and October $15 strike calls were active during the session, as well. Meanwhile, trading traffic in ETFC options is heaviest in near-term put options. It looks like the bulk of the volume is the work of one investor trading two legs of 6,300 puts each at the August $14 and $15 strikes just after 11:40 am ET this morning. The spread represents opening positions as put open interest is no greater than 277 contracts at each strike.

VG – Vonage Holding Corp. – The provider of broadband telephone services in the U.S., Canada and the U.K. popped up on our scanners within the first 20 minutes of the trading session after a large chunk of put options changed hands in the front month. Shares in Vonage currently trade 6.9% lower on the session at $4.05 as of 12:25 pm on the East Coast. The stock has come off roughly 25% from its 3-year high of $5.39 secured back in May. Despite the recent pullback, it looks like one optimistic player expects shares in Vonage to hold above $4.00 through August expiration. Vonage is scheduled to report second-quarter earnings ahead of the opening bell on August 3. The trader appear to have sold all 10,000 of the put options exchanged at the August $4.0 strike for a premium of $0.20 a-pop, against paltry previously existing open interest of 10 contracts at that strike. The massive put play is just under 3 times as large as Vonage’s overall open interest level of 3,485 contracts. The put seller keeps the full amount of premium received as long as the August $4.0 strike puts expire worthless at expiration in just over 4 weeks time. Short puts at that strike indicate the investor may have 1,000,000 shares of the underlying stock put to him at an effective price of $3.80 in the event that the options are exercised against him at August expiration.

XLNX – Xilinx, Inc. – Shares in Xilinx are down 1.5% at $33.17 this afternoon ahead of the chipmaker’s first-quarter earnings report after the final bell. Near-term put activity on the stock suggests some investors expect shares to continue to slide ahead of August expiration. One such pessimist appears to have purchased a bear put spread, buying 1,600 puts at the August $33 strike for a premium of $1.10 each, and selling the same number of puts at the lower August $31 strike at a premium of $0.44 apiece. Net premium paid to initiate the transaction amounts to $0.66 per contract. Thus, the investor is positioned to profit should shares in Xilinx decline 2.5% from the current price of $33.17 to breach the effective breakeven point on the spread at $32.34 by expiration day next month. The put-spreader may walk away with maximum potential profits of $1.34 per contract at expiration if shares in XLNX drop 6.5% to trade below $31.00. Options implied volatility on the stock is up 3.7% to arrive at 31.64% heading into earnings. The investor responsible for the spread may be taking an outright bearish stance on the semiconductor company, or could be using the put strategy to hedge a long position in the underlying shares.

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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