Option Activity Alert: HPQ, MS, ACI, ARIA

HPQ – Hewlett-Packard Co. – Options covering Hewlett-Packard Co. are densely populated today on news the company’s board is meeting to discuss ousting CEO, Léo Apotheker, less than one year after he was hired to replace former-HPQ CEO and current co-President of Oracle, Mark Hurd. Hope that a shakeup may get HPQ back on track, and speculation that the board may select former eBay CEO, Meg Whitman, to head the company, sent shares in the trodden-down stock up as much as 11.7% today to $25.10. Options implied volatility on Hewlett-Packard earlier rose to 56.05%, but currently stands 20.05% higher on the session at 53.47% as of 1:40 pm ET.

Investors have now exchanged more than 205,000 option contracts on HPQ, with much of the activity taking place in the front month. Calls are trading roughly 1.8 times to each single put option in play thus far in the session. In-the-money calls are popular with buyers positioning for shares to appreciate, while out-of-the-money calls suggest more of a mixed picture. Trading traffic in HPQ calls is heaviest at the October $25 strike, where upwards of 26,100 contracts changed hands against open interest of 11,574 positions. The Oct. $25 strike call was bought and sold in roughly equal numbers. Similar two-way trading is apparent in the Oct. $26 and $27 strike calls, but trading in deep out-of-the-money calls in the October contract was dominated by sellers. Meanwhile, investors positioning for shares to potentially surrender today’s gains in the next several weeks to October expiration, snapped up in- and out-of-the-money puts. Volume in the Oct. $23 strike put soared to 30,000 contracts in early-afternoon trade, trumping previously existing open interest of 3,737 lots. Buyers of the bearish options paid an average premium of $0.89 per contract for at least 11,500 of the puts, which may yield profits at expiration if shares in HPQ slip beneath the average breakeven price of $22.11.

MS – Morgan Stanley – Shares in Morgan Stanley, now down more than 52.0% since mid-February, may recover somewhat by November expiration, by the looks of a three-legged bullish options combination play initiated on the financial services firm this morning. Morgan Stanley’s shares lost 2.6% Wednesday ahead of the FOMC announcement to stand at $14.73 by 11:50 am in New York. The strategist betting on a rebound appears to have sold around 2,000 puts at the Nov. $14 strike for an average premium of $1.19 each, spread against the purchase of the 2,000-lot Nov. $15/$17 call spread at a net premium of $0.78 apiece. Premium received on the sale of the puts more than offsets the $0.78 net premium required to initiate the call spread, resulting in an average net credit of $0.41 per contract to the options player. The trader walks away with the net credit as long as shares in Morgan Stanley exceed $14.00 through expiration day. Additional profits on the position accumulate in the event that shares in MS trade above $15.00 at expiration. Maximum potential profits of $2.41 per contract – including the net credit received – are available to the investor if shares surge 15.4% in the next couple of months to trade above $17.00 at expiration day in November. Morgan Stanley’s shares last traded above $17.00 on September 1.

ACI – Arch Coal, Inc. – Coal stocks were hammered Wednesday after a number of industry players, including Alpha Natural Resources and Walter Energy, cut their production and sales forecasts. Analysts at Morgan Stanley cut the U.S. coal sector to cautious this week. Shares in Arch Coal plunged 9.2% to a fresh two-year low of $16.36 in early-afternoon trade, but one contrarian strategist populating November contract call options on the stock is prepared should shares rebound ahead of expiration. It appears the trader snapped up 5,000 calls at the Nov. $17 strike for a premium of $1.81 each, and sold the same number of calls at the Nov. $23 strike at a premium of $0.20 apiece, paying a net premium of $1.61 per contract for the bull call spread. The investor profits at expiration in November if shares in Arch Coal climb 13.75% to exceed the effective breakeven price of $18.61. Maximum potential profits of $4.39 per contract are available to the trader should shares jump 40.6% over the current price of $16.36 to trade above $23.00 at expiration day in November. The bullish play on Arch Coal, Inc. may work in the trader’s favor should the coal producer surprise to the upside in its third-quarter earnings release ahead of the opening bell on October 31. Options implied volatility on Arch Coal is off its highest of the session, but remains sharply higher by 17.7% on the day to stand at 71.41% this afternoon.

ARIA – Ariad Pharmaceuticals, Inc. – The Cambridge, Massachusetts-based drug maker popped up on our ‘hot by options volume’ market scanner this morning after a large chunk of put options changed hands in the Jan. 2012 contract. The big print in ARIA puts appears to be the work of one investor expecting shares in the pharmaceuticals company to exceed $6.00 through January 2012 expiration. Shares in Ariad Pharmaceuticals are up 0.70% at $10.31 today, ahead of the company’s presentation of updated Phase I data on ponatinib at the European Society of Hematology CML (Chronic Myeloid Leukemia) meeting in Portugal this week. It looks like 6,000 put options were sold at the Jan. 2012 $6.0 strike this morning at a premium of $0.30 each, against previously existing open interest at that strike of just 438 contracts. The trader responsible for the put selling walks away with the full amount of premium as long as shares in Ariad top $6.00 come expiration day next year. Shares would need to nosedive between now and Jan. 2012 expiration in order for the investor to amass losses on the position. The stock has dipped well below $6.00 within the most recent 12 months, and the short stance in the options puts the investor on the hook to potentially have 600,000 shares of stock put to him at an effective price of $5.70 each. Premium received on the sale of the puts protects the investor up to a point, but losses start to accumulate on the position if shares in ARIA plunge 45.0% from the current price of $10.31 to beach the effective lower breakeven point at $5.70 at expiration next year.

About Caitlin Duffy 373 Articles

Affiliation: Interactive Brokers

Caitlin Duffy joined Interactive Brokers in 2009. In her role as Equity Options Analyst, Caitlin provides daily market commentary; highlighting various options trades, trading patterns and strategies of interest. Through Interactive Broker's webinar program, Ms. Duffy presents a number of educational, options-related events describing the theoretical pricing of options, the option Greeks as well as options strategies.

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