Today's tickers: FCX, FST, COST, XRT, DHI, DLB, IYZ & INTC
FCX – Freeport-McMoRan Copper & Gold, Inc. – With the Dow Jones industrial average once again purging gains and with it investor optimism this afternoon, traders are seeking shelter from the turmoil. Some appear to have located a safe niche in Freeport-McMoRan. Shares have risen nearly 10% today to $27.46, though today's rally is a far cry from the 52-week high of $126.29. FCX specializes in the exploration, mining, and production of mineral properties around the world, particularly in copper, gold, molybdenum, and silver prospects. Thus, they may benefit greatly from a market in which 'all that glitters is gold' and everything else seems tarnished. One UBS analyst raised his forecast for gold to soar to a price of $1,000 per ounce this year, and for silver to amount to $14.75 an ounce. Such prospects had option traders mining for calls in various contracts today. Call buying occurred in February at the 30 strike, where nearly 8,000 were purchased for 83 cents apiece. In March, about 4,000 calls were bought at the 30 strike for 2.06 each. August had almost 3,000 calls scooped up for a premium of 5.49 at the 30 strike, which would profit the buyers if shares can rebound to $35.49 by expiration.
FST – Forest Oil Corp. – Though gas and oil prices are currently in a trough, one investor appears to see the light at the end of the tunnel and using options contracts today devised a dramatic strategy banking on a rebound in FST shares during the next two years. Shares in the independent oil and gas company are trading at $14.91 and are 3.7% higher today. The company specializes in the acquisition, exploration, development, and production of natural gas and liquids largely in North America. FST's acquisition program, highlighted in the recent quarterly report, added over 150,000 net undeveloped acres located in East Texas, Northern Louisiana, and Panhandle areas, which comprise Forest's core region. An investor initiated a spread trade by purchasing 6,600 far-dated calls at the 45 strike price expiring January 2011 for a cost of 1.20. Simultaneously, he sold 5,000 puts at the front March 15 strike price for a premium of 1.70. Thus, it appears that the put premium is funding this spread and nets the trader a 50 cent premium. This far-term bullish stance looks to be betting on the success of FST's strategy today and that it will reward investors with a substantial share price rebound down the road. Treating the two transactions separately the risk is of a move below a $13.30 breakeven by March. The investor could have shares put to him at $15.00 apiece with the put premium effectively reducing the cost of ownership. The journey may be a long one through January 2011 but might prove a rewarding one for this investor.
COST – Costco Wholesale Corp. – Estimated second quarter earnings for the warehouse retailer were way off analyst expectations of 70 cents per share, and investors should not expect to hear much more regarding 2009 estimates from the Washington-based company. It appears that they have washed their hands of such a task given the tough terrain and uncertain pitfalls that the retail sector faces in the coming year. Option traders wasted no time getting in on the action, although trades appear to be more optimistic than one would expect given that shares have slipped nearly 9% today to $42.07. In the February contract it appears that traders are pocketing rising premiums by selling puts. Gains were most apparent at the February 42.5 strike where over 1,000 puts were sold for 1.46 each, and at the February 45 strike where over 1,200 puts sold for 2.96 apiece. In March it appears that one trader initiated a sold strangle play by selling 2,000 calls at the 45 strike for 1.43 and selling 2,000 puts at the 40 strike taking in 1.52 per contract. The net 2.95 premium written by this investor indicates that shares will remain hemmed between $37.05 and $42.95 through March expiration.
XRT – SPDR S&P Retail ETF – This premium-selling theme spilled over into the retail exchange traded fund where investors sold a total of more than 23,000 puts at the February strike using the 19.0 strike. Today shares have added to above $20.00 in the fund whose holdings include famous stores such as Family Dollar, Guess? Inc., Supervalu Inc., Aeropostale and online store, Amazon.com. The option activity has the investor taking in the premium, which is trading at an implied volatility reading of 53% and nets the investor an average of around 45 cents. In this case shares would need to decline to a breakeven beneath the put's striking price at $18.55 before the investor loses money. Should shares continue to rebound those sold puts will expire without value.
DHI – DR Horton Inc. – Option implied volatility is now at its lowest level since October at DR Horton as option actors play out a couple of interesting trades in Wednesday's session. A covered put play was established early this morning involving the sale of both stock and puts employing the February 7.5 strike, where 25,000 lots were sold at 65 cents. Shares, which were trading at $7.30 at the time of the short sale have continued yesterday's rebound adding 6.7% to $7.93 today. Meanwhile investors have graduated to straddle selling involving calls as well as puts at the same February series involving 13,000 contracts sold for a 1.15 cent premium. Investors selling volatility in this fashion expect less price movement going forward and would hope that shares remain range bound between $6.35 and $8.65 into expiration. The housing market received a tiny dose of positive news yesterday with a rebound in pending home sales and today with a jump in mortgage refinancing activity.
DLB - Dolby Laboratories Inc. – With a mission to enrich the entertainment experience, Dolby develops and delivers innovative products and technologies in order to make aspects of entertainment more realistic in theatres, home, cars, and other environments. There is very little open interest in Dolby's options, in fact just over 16,000 lots. Today it appears that an investor is taking the view that the recent malaise in its share price may have bottomed out at around $25 per share and that today's 3.3% gain to $26.45 might be the beginning of something more substantial. The investor has placed some type of ratio credit put spread involving around 5,500 puts bought at the 25 strike expiring later this month and sold 4,000 lots at the higher 30 strike. The thought process with writing a put spread in this way is that shares in the underlying will rise leaving the investor receiving a net credit for options that turn out to be worthless by expiration. Today the investor received a net credit of 1.65 per contract, which in essence requires the shares to be trading above $27.35 to breakeven at expiration, although the ratio nature of this trade muddies the actual value required.
IYZ – iShares DJ US Telecommunications ETF – A tidy amount of 10,000 call options were sold in the March contract in the telecom ETF this morning as shares edged up 1% to $16.00. Around 43% of the capitalization of the fund is comprised of shares in AT&T Inc., Verizon and Sprint Nextel. During the last four months the pattern has seen a range established between $13.00 and $18.00, but rarely has its share price managed to surpass $17.35, which is possibly why an investor wrote 7,500 calls at the 17.0 strike to gather the 35 cent premium, while at the same time settling for the dime from writing 2,500 calls at the 18.0 strike. The investor loses out at the lower strike should the telecom sector rebound by March sending shares higher than $17.35, while the shares would still need to rally 13% before costing money at the higher strike. Implied volatility is steady at around 40% today.
INTC – Intel Corp. – Option traders drove the semiconductor chip-maker to the forefront of our 'most active by option volume' market scanner today. Shares of INTC have rallied by almost 7% to $14.46 and the surge has some investors shedding 2,700 calls at the February 14 strike for 61 cents and purchasing 3,400 calls at the February 15 strike for 26 cents each. But, traders aren't ready to swim without a life preserver, and thus, put buying was heavy in February with 3,300 puts bought for 44 cents at the 14 strike and about 2,200 puts purchased for an average price of 1.04 each at the 15 strike price. In April one investor appears to have made a bearish play at the 13 and 14 strikes by implementing a put spread using around 15,000 puts at each strike, where the spread has narrowed from 47 cents to 27 cents as the share price rallies today. This looks like a trader using a rising share price to seek protection against a lurch lower. The most the investor can make from a put spread costing 40 cents today is 60 cents should shares be lower than $13.00 at expiration.