Options Activity Alert: ZLC, KFT, VRX

ZLC – Zale Corp. – Shares in jewelry retailer, Zale Corp., rallied as much as 6.7% this morning to hit a fresh 52-week and intraday high of $5.89. The stock rose sharply last week as well after the company reported its seventh consecutive quarterly increase in sales and a narrower-than-expected fourth-quarter loss. The stock has nearly doubled in value since the beginning of August, and is up 185% since trading down to a 52-week low of $2.06 back in October. Options traders appear to be selling put options in the front month and picking up October expiration calls. It looks like 320 puts were sold for a premium of $0.10 each at the Sep. $5.0 strike today versus open interest of 544 contracts. Around 400 of the existing positions in the $5.0 strike put appear to have been purchased on Friday for a premium of $0.17 apiece. Put sellers may be ditching recently purchased downside protection on the name as the shares continue to climb, or could be selling the contracts outright in the expectation that the puts expire worthless later this month. Meanwhile, the purchase of around 170 of the Oct. $5.0 strike calls for an average premium of $0.84 per contract today indicates one or more strategists are positioning for shares to continue higher during the next seven weeks. Call buyers stand ready to profit at expiration next month should Zale Corp.’s shares rally 5% over the current price to exceed the breakeven point at $5.84. The stock is currently off its highs of the session, trading up 0.72% at $5.56 as of 12:45 p.m. in New York.

KFT – Kraft Foods, Inc. – The food products company popped up on our ‘most active by options volume’ market scanner this morning after a burst of trading activity in the September expiry calls. The trader or traders responsible for the bulk of the roughly 18,000 contracts in play on the stock this morning may be positioning for shares in Kraft Foods to rally to their highest level so far this year. Shares in KFT are flat on the session at $41.51 as of midday in New York. Out-of-the-money calls are active across several strike prices in the front month, with around 510 contracts purchased at the Sep. $41 strike for an average premium of $0.85 each and around 1,600 lots purchased at the $42 strike at $0.35 apiece. Volume is heaviest up at the Sep. $43 strike where upwards of 10,200 calls changed hands against open interest of 641 contracts. The bulk of the volume, some 8,200 call options, traded to the middle of the market at a premium of $0.10 apiece. Roughly 1,000 of the total volume in $43 strike calls were purchased for an average premium of $0.08 per contract. Buyers of the $43 calls stand ready to profit at expiration should the price of the underlying rally 3.8% to top the average breakeven price of $43.08. Kraft Foods is scheduled to present at the Barclays Back to School Conference in Boston on Thursday.

VRX – Valeant Pharmaceuticals International, Inc. – Shares in Canada’s largest publicly traded drug maker jumped 17% to $59.99 on Tuesday morning after the company announced Monday it will purchase Medicis Pharmaceutical Corp. for $44.00 a share. Options on Valeant are far more active than usual on news of the acquisition, with volume pushing 46,200 contracts as of 11:20 a.m. ET, versus the stock’s average daily options volume of around 3,265 contracts. Fresh interest in September expiry calls indicates some traders are positioning for the price of Valeant’s shares to extend gains in the near term. Options traders exchanged more than 1,100 calls at the Sep. $60 strike versus previously existing open interest of ten contracts. It looks like most of the calls were purchased this morning for an average premium of $1.73 apiece, thus positioning buyers to profit should VRX shares rally another 3% to top the average breakeven price of $61.73 at expiration. Bullish activity spread to the Sep. $65 strike where around 450 calls were picked up at an average premium of $0.35 each. Traders long the higher-strike contracts stand ready to profit at expiration in a couple of weeks should Valeant’s shares surge 9% to top $65.35.

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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