Option Activity Alert: DNKN, PFCB, DDD, PLCE

DNKN – Dunkin’ Brands Group, Inc. – A burst of activity in calls and puts covering Dunkin’ Brands Group may be one investor’s way of preparing for a less than savory third-quarter earnings report when the company reveals its performance on November 2. Shares in the operator of Dunkin Donuts and Baskin-Robbins fell 0.90% to $28.16 this afternoon, and are down roughly 11.8% off the company’s post-IPO high of $31.94. The options combo initiated in the November contract this morning yields maximum benefits to its owner if shares in Dunkin’ suffer a nearly 30.0% pullback in the next six weeks. It looks like the investor responsible for the trade sold around 500 calls at the Nov. $30 strike for a premium of $1.375 each, in order to cover the cost of buying a roughly 500-lot Nov. $20/$25 put spread at a net premium of $0.90 each. The trader pockets a net credit of $0.475 per contract on the three-way spread, which he keeps as long as shares in DNKN fail to rally above $30.00 through November expiration. Additional profits are available to the investor should shares breach the $25.00-level, while maximum possible gains of $5.475 – including the net credit – are realized by the trader in the event that DNKN’s shares plummet nearly 30.0% to trade below $20.00 at expiration day. As far as possible motives behind the three-legged spread go, the potential for a disappointing third-quarter report represents just one possible explanation, as performance in U.S. equities across the board has tended to turn on a dime on negative or positive headlines out of Europe. The investor responsible for the transaction may be taking an outright bearish stance on the stock, or may be using the position to hedge long stock in DNKN through earnings. The short calls at the $30.00 strike may require the trader to deliver approximately 50,000 shares of the underlying that he may or may not already own at expiration day if the calls land in-the-money.

PFCB – P.F. Chang’s China Bistro, Inc. – Put activity on the restaurant operator suggests some options traders may expect shares in PFCB to resist making new multi-year lows through November expiration. The stock had reached a five-year high of $53.39 in December 2010, but subsequently spent much of the past 10 months on the decline. Shares today are down 1.8% at $27.11, bringing total share price erosion off the December high to nearly 50.0%. Investors exchanged more than 2,400 puts at the November $25 strike against previously existing open interest of 114 contracts. The volume of the put trades is relatively large next to the stock’s overall open interest of 8,773 contracts. It looks like most of the Nov. $25 puts were sold for an average premium of $1.31 per contract. Put sellers keep the full amount of premium received as long as shares in the restaurant operator exceed $25.00 through expiration day next month. P.F. Chang’s reports third-quarter earnings before the market opens on October 27. An earnings miss, worrisome headlines out of Europe, or signs of slowing growth in the U.S. and global economies could see PFCB’s shares extend losses. Investors short the puts could wind up having shares of the underlying put to them at an effective price of $23.69 each, after factoring in premium received on the options, should the puts land in-the-money at November expiration.

DDD – 3D Systems Corp. – The provider of 3D content-to-print solutions popped up on our ‘hot by options volume’ market scanner in the first half of the trading session due to heavier-than-usual trading in February contract calls. Shares in 3D Systems Corp. earlier fell as much as 2.7% to $15.32, but pared losses to rise 0.85% to $15.89 by 11:50 am in New York. One investor populating DDD calls appears to be positioning for shares to extend gains during the next five months. It looks like the trader purchased a bull call spread, buying 1,000 calls at the Feb. 2012 $17.5 strike for a premium of $2.20 each, and selling the same number of calls at the Feb. 2012 $22.5 strike at a premium of $0.75 apiece. Net premium paid to initiate the spread amounts to $1.45 per contract, thereby positioning the investor to profit should shares in 3D Systems rally 19.25% to surpass the effective breakeven price of $18.95 by expiration day in February. The call spread may yield maximum potential profits to the trader if the price of the underlying jumps 41.6% over the current price of $15.89 to exceed $22.50 at expiration. Shares in DDD had been trading above $22.50 as recently as July. The company is scheduled to report third-quarter earnings ahead of the opening bell on October 27.

PLCE – Children’s Place Retail Stores, Inc. – The specialty retailer of children’s clothing saw greater-than-normal activity in its options this morning. It looks like one call seller populating the November contract expects the stock to resist below a specified ceiling through expiration day in six weeks. Shares in the name are currently down 0.20% to stand at $48.38 as of 1:15 pm on the East Coast. A block of 2,000 calls changed hands at the Nov. $55 strike against paltry previously existing open interest of just 20 contracts. The call options appear to have been sold by one options player for a premium of $0.85 per contract. The investor responsible for the transaction walks away with the full amount of premium at expiration in the event that Children’s Place Retail Stores’ shares fail to rise above $55.00. The stock had been as low as $36.96 on August 9, down nearly 35.0% off a six-month high of $55.90, but fought back hard since then to recover all the way back to 49.92 this week. Shares have rebounded substantially, but the investor behind the call selling today casts his doubt on PLCE’s ability to top $55.00 by November expiration. The retailer’s shares would need to rally 15.4% over the current price of $48.38 by expiration in order for the investor to start losing money above the $55.85 breakeven point to the upside.

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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