Options Activity Alert: DMND, MHS, TRIP

DMND – Diamond Foods, Inc. – Investors sent shares in the maker of Pop Secret and Emerald snack nuts sharply lower on Thursday after the Company said it will replace its top two executives and restate earnings for the past two years. The already hard-hit stock opened down more than 40.0% this morning to touch an intraday- and multi-year low of $21.44. Options on Diamond Foods attracted all kinds today, with some strategists nibbling at calls and selling puts, while others position for further downside in the name. Investors expecting shares to somewhat recover in the next six trading sessions picked up call options in the front month. Approximately 1,400 calls were purchased at the Feb. $25 strike for an average premium of $0.86 each. Call buyers may profit at expiration next Friday in the event that DMND’s shares rally 11.2% off the current price of $23.25 to top the average breakeven price of $25.86. Meanwhile, out-of-the-money put selling in the front month may mean some traders expect the stock is unlikely to tumble much further from here within the next week. Put sellers looked to the Feb. $20 strike, selling around 1,500 of the contracts to receive an average premium of $0.64 per contract. Traders keep the full amount of premium as long as shares in Diamond Foods exceed $20.00 through expiration. Options volume on the food products company today currently exceeds 95,000 contracts, an active day for the stock, which has 158,981 contracts comprising overall open interest.

MHS – Medco Health Solutions, Inc. – Shares in the pharmacy-benefits-manager (PBM) are off slightly this morning, down 0.20% at $60.70 as of 11:30 a.m. in New York, but options activity in the name suggests the stock could take a big hit in the next couple of months. A one-by-two ratio put spread in the April expiry has been growing in size throughout the first half of the trading session. The investor responsible for the spread could be bearish on the prospects for deal with Express Scripts, thus establishing the spread to potentially profit from a pullback in the price of the underlying in the event that regulators ax the merger. Alternatively, the strategist may be long the underlying shares and hedging the position using options to protect against share price declines, while still maintaining upside exposure. It looks like the trader paid an average net premium of $0.50 per contract, buying around 8,000 puts at the April $55 strike, and selling approximately 16,000 puts at the lower April $47.5 strike. Profits or downside protection kick-in if Medco’s shares drop 10.2% to breach the average breakeven point at $54.50. Maximum potential profits of $7.00 per contract are available on the trade if shares in MHS plunge 21.75% to settle at $47.5 by April expiration.

TRIP – TripAdvisor, Inc. – Shares in the operator of online travel brands Hotels.com and Hotwire went South overnight in the wake of a disappointing earnings report, lower-than-estimated full year guidance and a barrage of analyst downgrades. The stock is down 16.0% at $28.86 just after 1:00 p.m. on the East Coast. Options volume on TripAdvisor is heaviest at the June $25 strike, where it looks like one investor purchased 1,245 deep in-the-money calls for a premium of $5.30 each. Perhaps the investor is happy to effectively get long the stock at the current level in the hopes that by June expiration the shares have recovered.

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.

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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