Option Activity Alert: SVU, OMX, URBN

SVU – SUPERVALU Inc. – The sale of a massive block of 25,000 call options on the supermarket operator this morning may mean one strategist has little appetite for a significant Supervalu rally, at least through September expiration day. No telling if the two are related, but the sale of the call options occurred roughly one hour before the company’s CFO was scheduled to present to investors at the Goldman Sachs 18th Annual Global Retailing Conference in New York City. SVU’s shares rallied at the open, increasing 2.5% to an intraday high of $7.84, but surrendered much of those gains to stand 0.65% higher on the session at $7.70 as of 12:25 pm ET. The investor responsible for the hefty transaction may or may not be long the stock. It looks like the trader sold 25,000 calls outright at the September $8.0 strike for a premium of $0.20 per contract. The premium remains in the investor’s wallet as long as Supervalu’s shares trade below $8.00 and the calls expire worthless at expiration next week. Potentially devastating losses could result for the trader if the short calls are uncovered, and the price of the underlying stock spikes higher ahead of expiration. Premium received on the sale of the calls provides limited protection in the event of an SVU rally, but the insurance policy gives way to losses if SVU’s shares exceed the effective breakeven price of $8.20 at September expiration day. If the investor is long the stock, it seems he is happy to pad his portfolio with premium today, and willing to have shares called from him at $8.00 should the calls land in-the-money next Friday.

OMX – OfficeMax Inc. – Shares in the office supplies retailer rallied 6.3% this morning to $5.59 despite third-quarter sales estimates that trail those recorded in the same period last year, CEO Ravi Saligram’s comments that OfficeMax is, “experiencing a soft Back-to-School season,” and tough macroeconomic conditions to boot. Saligram spoke today at the Goldman Sachs Annual Global Retailing Conference. OfficeMax said it plans to update guidance for the third quarter and the second half of 2011. Though shares are sharply higher in the first half of the trading session, options activity on the stock suggests the rally may be short lived. Bearish players selling calls and buying puts on the retailer benefit the most if shares in OMX drop to new 52-week lows in the weeks ahead. Most of the bearish activity appears to be the work of one strategist who acted within minutes of the opening bell, and who may or may not be long the stock. It looks like the trader sold more than 1,100 in-the-money calls at the September $5.0 strike, against previously existing open interest of just 67 contracts, in order to pocket premium of $0.40 apiece. The investor walks away with the premium as long as OfficeMax’s shares drop 10.6% to trade beneath $5.00 at expiration next Friday. Next, it appears the trader sold around 950 calls at the October $6.0 strike for an average premium of $0.32 a-pop. The call seller keeps the premium received if OMX’s shares fail to rally above $6.00 at expiration day next month. Meanwhile, 200 September $5.0 strike puts and 1,150 October $5.0 strike puts were picked up for premiums of $0.25 and $0.60 apiece, respectively. Put buyers in the front month profit in the event that shares in OMX plunge 15.0% to breach the effective breakeven point on the downside at $4.75 by expiration. The longer-dated October $5.0 strike puts are a profitable acquisition at expiration next month as long as shares in OfficeMax fall 21.3% to trade below $4.40. Shares in OMX touched down at a 52-week low of $5.02 on Tuesday, and last traded beneath $4.40 back in April 2009.

URBN – Urban Outfitters, Inc. – Shares in the specialty retail company that operates under well-known brands, including Urban Outfitters and Anthropologie, dropped sharply this morning, but fought their way back to trade 2.5% lower on the session at $25.13 in early-afternoon trade. The stock opened down 8.8% at an intraday- and new 52-week low of $23.50 after the company reported disappointing comparable-store sales at its retail business in the quarter to date. A number of analysts cut their share price targets on Urban today, which has performed disastrously in 2011. The stock trades at a 40.0% discount to its March 7¬, 2011, 52-week high of $39.26. URBN popped up on our ‘hot by options volume’ market scanner after a fleet of options sellers converged on the stock. Trading patterns in the front month suggest investors are selling both calls and puts, perhaps because they expect the price of the underlying to stagnate through expiration day next week. Investors hoping shares in Urban Outfitters have reached a bottom for the time being sold around 1,200 puts at the September $25 strike for a premium of $1.30 each. Traders keep the premium received on the sale as long as shares exceed $25.00 through expiration day. Aroung 1,000 puts sold for an average premium of $0.58 each at the lower September $24 strike this morning, as well. Meanwhile, call sellers at the September $25 and $26 strikes placed a ceiling on shares in the retailer. It looks like investors sold around 610 calls at the Sept. $25 strike for a premium of $0.46 each, and nearly 3,000 calls at the Sept. $26 strike at a premium of $0.20 apiece. Traders short the calls walk away with premium in hand as long as the call options expire worthless at expiration day. Unless call sellers are long the stock, the short options may result in painful losses next Friday if shares in URBN move against them.

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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