Options Activity Alert: CMG, SWHC, MIPS

CMG – Chipotle Mexican Grill, Inc. – Traders who initiated bullish bets on burrito maker, Chipotle Mexican Grill, on Thursday are sitting on serious overnight paper profits this morning, with shares in the restaurant operator up as much as 6.75% to hit $322.74 in the first half of the session. Some strategists hungry for an end-of-week rally in CMG looked to the weekly options contracts that are now in their final day of trading. Call open interest at the Sep. 07 ’12 $300 strike increased by 773 contracts since the prior session to total 1,501 contracts, with the majority of the fresh interest initiated by buyers paying an average premium of $0.30 per contract on Thursday morning. At the time of purchase, the calls were out-of-the-money given the underlying share price of roughly $294.00. But, by the close of trading on Thursday, the call options were squarely in-the-money with the stock ending the session at $302.33. The rally in CMG shares yesterday lifted premium on the calls to around $3.40 each by the end of the day, an 11-fold increase over the $0.30 per contract paid by early-bird buyers on Thursday morning. Fast forward to Friday morning; the sharp rally in Chipotle shares now has those $300 strike weekly calls deep in-the-money with a bid/ask spread of $22.20/$23.20 as of 11:30 a.m. in New York. Selling-to-close the positions now at $22.20 would make for overnight gains of around 7,300%. Traders could also decide to roll the calls out to maintain upside exposure in the name, or may hold the contracts through expiration and take delivery of the stock at an effective price of $300.30 a share. Like-minded bulls that purchased upside calls in the newly issued Sep. 14 ’12 expiration weekly options yesterday are seeing big gains in the value of their positions, as well.

SWHC – Smith & Wesson Holding Corp. – Shares in gun maker, Smith & Wesson Holding Corp., shot up 22% this morning to touch a new four-year high of $11.00 after the company forecast higher-than-expected profit and revenue for the full year and posted first-quarter earnings and sales that handily beat average analyst estimates. Options traders positioning for shares in Smith & Wesson to rally post-earnings and potentially extend gains through the end of the calendar year picked up December expiration call options earlier in the week. Rising open interest at the Dec. $6.0 strike on Wednesday and Thursday indicates one or more traders were opening positions in deep in-the-money calls, increasing the number of existing positions to 845 contracts. A look back at trading traffic in the $6.0 strike call this week suggests 500 of the calls were purchased on Wednesday for a premium of $3.10 each, while another 200 contracts were picked up on Thursday at a premium of $3.30 apiece. The sale of 700 of the Dec. $6.0 strike calls in the first 15 minutes of the trading session this morning at a premium of $4.70 apiece may mean traders opted to take the money and run. If in fact buyers are selling-to-close their positions, net profits on the bullish play amounts to $1.60 per contract. Overall options activity on SWHC is far more active than usual following the sharp upside move in the underlying, with total volume in excess of 9,400 contracts as of 12:15 p.m. in New York versus the stock’s average daily volume of 1,900 contracts.

MIPS – MIPS Technologies, Inc. – Sunnyvale, California-based, MIPS Technologies, Inc., popped up on our scanners this morning following heavy activity in the front month calls. Shares in MIPS have gained nearly 20% since last Thursday on speculation the company may be broken up or sold this year, with the stock adding another 2.7% this morning to secure a new 52-week intraday high of $7.50. Options traders accumulating long calls on the stock during the past four weeks are benefitting from double digit percentage gains in the price of the underlying. A review of trading traffic in the Sep. $7.0 strike call in recent weeks reveals much of the 4,957 contracts in open interest were purchased for an average premium of $0.30 apiece. The contracts are more than twice as expensive as of this afternoon, with the bid/ask spread on the $7.0 strike call now at $0.65/$0.75 as of 12:35 p.m. ET. Fresh interest in the Sep. $8.0 strike call this morning may mean traders are positioning for shares to continue to move higher in the near term. More than 4,300 calls changed hands at the Sep. $8.0 strike against open interest of 1,042 contracts, with most of the volume purchased for an average premium of $0.26 apiece. The bullish strategy may pay off at expiration in a couple of weeks if MIPS shares tack on another 10% to top the average breakeven price of $8.26.

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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