Bulls take to Research in Motion calls

RIMM – Research in Motion, Ltd. – Renewed takeover speculation lifted shares in beaten-down Blackberry-maker Research in Motion this morning, spurring fresh bullish activity in weekly call options and driving options implied volatility on the stock higher. RIMM’s shares earlier rallied as much as 5.1% to $18.77, but have cooled somewhat as of 11:50 AM ET to stand a lesser 2.5% higher on the day at $18.30. Investors placing immediate-term bullish trades targeted the Dec. ’02 $18 and $19 strike calls, which have one full day of trading left to expiration. Traders paid an average premium of $0.45 apiece to pick up more than 1,100 in-the-money calls at the Dec. ’02 $18 strike, and shelled out an average of $0.16 in premium per contract for some 3,500 calls at the higher $19 strike. Meanwhile, the newly available weekly options that expire next Friday attracted the attention of speculators as well. Options traders purchased calls at the Dec. ’11 $19, $20, $21 and $22 strikes to position for RIMM’s shares to extend gains. Investors purchased roughly 850 calls at the Dec. ’11 $19 strike for an average premium of $0.53 each, and snapped up nearly 700 of the Dec. ’11 $20 strike calls at an average premium of $0.39 apiece. Call buyers at these strikes may profit at expiration next week in the event that shares in Research in Motion surge 6.7% and 11.4% over the current price of $18.30 to surpass the average breakeven prices of $19.53 and $20.39, respectively. Roughly 88,000 option contracts have changed hands on RIMM as of midday on the East Coast, with calls trading more than 2.3 times for each single put option in play.

PIR – Pier 1 Imports, Inc. – The home furnishings retailer popped up on our ‘hot by options volume’ market scanner this morning after one strategist initiated a bullish stance in March 2012 contract calls. The specialty retailer raised its third-quarter earnings estimate from $0.18 a share to a range of $0.20 to $0.21 a share, and said comparable store sales increased 7.0%. Shares in Pier 1 Imports are down 2.05% in early-afternoon trade to stand at $13.31, but one investor is preparing for the price of the underlying to realize significant gains over the next four months. It looks like the trader purchased 1,060 calls at the Mar. 2012 $17 strike for a premium of $0.40 per contract. The position may be profitable at expiration next year in the event that Pier 1’s shares jump 30.7% to exceed the effective breakeven price of $17.40. PIR’s shares are currently hovering around their highest level in years, and haven’t topped $17.40 since 2005. The company is scheduled to report third-quarter earnings on December 15, 2011, ahead of the opening bell.

BKS – Barnes & Noble, Inc. – Shares in the click-and-mortar book seller and maker of the NOOK ereader were slammed today, dropping as much as 23.9% to $13.27, after the company posted a second-quarter loss of $0.17 a share ahead of the opening bell this morning. Analysts on average had been expecting Barnes & Noble to earn $0.03 a share in the quarter. The sharp post-earnings report move in the price of the underlying spurred heavier-than-usual trading traffic in BKS options, with nearly 25,000 contracts having changed hands on the stock by 12:45 PM in New York. Call options are far more active than puts at present, and it looks like some strategists may be positioning for shares to improve in the New Year. The stock was raised to ‘buy’ from ‘hold’ with a 12-month share price target of $25.00 at Stifel Nicolaus today. One trader appears to have purchased 4,935 call options at the Jan. 2012 $15 strike for a premium of $1.70 each. The investor may profit at expiration in January in the event that shares in Barnes & Noble rally 12.6% over the currently price of $14.83 to surpass the effective breakeven point on the upside at $16.70. Calls at the Jan. 2012 $16 and $20 strikes were also heavily traded in the first half of the session, though not all strategists were buyers. Traders with a bearish outlook on the book seller snapped up 2,200 puts at the Jan. 2012 $12.5 strike for an average premium of $1.00 each. Put buyers stand prepared to profit if BKS shares plunge 22.5% to breach the breakeven price of $11.50 at expiration seven weeks from now.

TWC – Time Warner Cable, Inc. – Put activity in the front month on Time Warner Cable suggests one investor is positioning for shares in the cable operator to top $60.00 at expiration in a few weeks. The stock presently trades 0.50% higher on the session at $60.80 as of 1:05 PM in New York. It appears the trader responsible for just about all of the activity in TWC options today sold a 2,000-lot Dec. $55/$60 put spread to pocket a net credit of $0.83 per contract. The investor keeps the $0.83 net credit and maximum potential profit on the position as long as shares in Time Warner exceed $60.00 and the put options expire worthless later this month. Risk of loss in this strategy far outweighs potential reward in the event that TWC shares pull back. Specifically, the investor starts to lose money on the position if shares fall 2.7% to breach the effective breakeven point on the spread at $59.17. The trader may realize maximum possible losses of $4.17 per contract should the price of the underlying plunge 9.5% in the next few weeks to trade below $55.00.

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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