Today's tickers: ANF, LBTYA, LCAPA, VIX, ITMN, HD & LLY

ANF – Abercrombie & Fitch Co. – Shares of the specialty retailer are off slightly by less than 1% to stand at $22.35. ANF has long since abandoned its original 1982 mission to supply rugged, high-quality, outdoor gear – which they provided at that time to outfit such well known 19th century stars as Teddy Roosevelt and Ernest Hemingway for their respective safaris. No, today the clothiers promote styles for a new kind of jungle, that experienced by the youth of America – well at least for those who can afford the pricey pre-torn jean skirts and frayed sweatshirts which have undoubtedly been emblazoned with the A&F logo in as many places as possible. ANF climbed onto our 'most active by options volume' market scanner with a number of investors dabbling in the March and April contracts. In March at the 22.5 strike price, one investor appears to have sold a 9,500 lot straddle by selling puts for 1.67 each while shedding the same number of calls for a premium of 1.58 apiece. The gross premium amounts to 3.25 on the trade and yields breakeven points at $19.25 on the downside and at $25.75 on the upside. This individual has seen that ANF shares have remained stable despite the fact that the Dow Jones Industrial Average has reached its lowest point in 12 years time. Implied volatility has come off by 7% to 66%, further evidence which this straddle seller can reference in justifying his opinion that shares of the retailer will remain within the specified breakeven points of the trade until expiration next month.

LBTYA – Liberty Global, Inc. Class A – The company provides video, voice, and internet access services to countries around the world, and today has experienced a 3% decline in shares to $12.45. One investor initiated a covered put at the April 10 strike price by selling 15,000 puts for a premium of 40 cents, while simultaneously selling underlying shares of the media company. This investor likely expects shares to fall and the position was established in order to take in premium today while at the same time providing an exit strategy at a share price of $10.00. The 52-week low on the stock stands at $9.67, while the put premium of 40 cents arguably protects a buyer only if shares break beneath it. In other words the seller is taking full advantage of the premium, which already accounts for a further slide in the share price, but by selling stock today the investor will have shares put back to him at the strike price without even having to worry about a new low. The risk is that shares rally in his face. Implied volatility has declined from 81% yesterday to today's value of 76%.

LCAPA – Liberty Media Corporation New-Capital Common Series A – Shares of the media and entertainment company are down by almost 3% to stand at $5.70, and the puts in action on the stock outweighed calls by 38.25 to 1. Contrary to the traditional strategy of buying puts when shares decline, the 2,500 contracts in play at the April 5.0 strike price were sold for a premium of 55 cents each. Perhaps investors are taking profits on existing positions at that strike, as the open interest amounts to 11,300 as of today. However, a naked sale of puts with this premium implies a breakeven share price of $4.45, which would require a share price slide of 22% before April. Sure it could happen, but perhaps investors behind today's activity think they know this company better. Implied volatility has fluctuated throughout today, ranging from 73% to 85%.

VIX – CBOE VIX Index – We've provoked before in this space the question of where the VIX would be when the market reached new lows. Would lower equity index prices be synonymous with a higher degree of investor fear? The answer turned out to be a resounding 'no' with the VIX gently straddling the 50 index level inferring a greater degree of order as markets slumped. Today as equity prices take back their gains investors are looking ahead to March options expirations and making the bold prediction that volatility will remain part of the mix going forward. By selling around 10,000 put options at the 35 strike, investors are pocketing premium should the fear gauge remain above this level at expiration. While selling naked puts exposes substantial losses, these investors seem confident that the road to recovery will be long and littered with challenges for central bankers and governments. In other words, they don't see fear subsiding anytime soon.

ITMN – Intermune Inc. – An options trade of note caused Intermune to appear on our market scanners today. The biotech company develops and commercializes pulmonary and hepatology-related therapies and recently drew the attention of SAC Capital hedge fund, which apparently now owns a 5% stake. It's a volatile stock, which is to be expected of biotech and life sciences companies. Historic volatility on the shares at 113% compares to implied options volatility of 82%. Investor fortunes keep taking a knock at the $20.00 share price where hopes keep getting dashed. Shares are trading at $16.08 today – down 3% - and at its worst point this year, coincident with the 2008 market meltdown, fell as low as $8.66. Today's trade combination created a bullish position on the stock at a knock-down value leaving the investor exposed to upside potential on prospects for the company through January 2011. The investor combined the sale of 3,500 strangles expiring in October and used the proceeds to fund call options expiring down the road in January 2011. Ordinarily the cost of the calls would have been around 6.80 per contract, but the sale of the 12.5/22.5 strike strangle reduced this to 2.50. The investor is expecting the shares to remain range bound this year, but clearly expects better things of the market and for product announcements to be forthcoming by expiration. If all goes well, the investor faces an upside breakeven share price of $25.00.

HD – Home Depot - Shares in the do-it-yourselfer are lower by 2.5% at $20.16 today, while options activity suggests an investor is defending a long stock position by simultaneously buying August at-the-money puts at the 20.0 strike for 3.0 and selling calls at the 27.5 line for 54 cents. In so doing the investor is mitigating the risk of exposure to the company and essentially offsetting the declining share price below $17.46. A long put position would lessen that breakeven to $17.00. In exchange for the extra cushion here the investor appears happy to have the stock called away at expiration should it have its plumbing and electrics back in good working order at the 25.5 strike. Implied volatility is at 51% on its options today.

LLY – Eli Lilly & Company – The pharmaceutical company edged onto our 'hot by options volume' market scanner and caught our attention due to a covered call initiated in the October contract. Despite the 1.85% share price decline to $32.30, one investor revealed guarded optimism on the stock. At the October 42.5 strike price, the trader appears to have purchased shares of the underlying stock while simultaneously selling 7,700 calls for a premium of 64 cents per contract. We believe that this investor is using options in order to zero in on a target price at which to exit his underlying position – in other words, to have the shares called away from him should their price rise to $42.50 by this coming fall. If this is indeed what has occurred, the trader pockets the 65 cent premium and sets himself up to make a gain of 31.5% on the shares if the calls land in-the-money by expiration.

Andrew Wilkinson

Senior Market Analyst

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