Today’s tickers: PFE, HPQ, EFA, C, Q, AGN, VIX, LTD, XHB, SYK, IP & TGT

PFE – Pfizer Inc. – Shares of the pharmaceutical company have declined slightly by less than 1% to stand at $13.93. Pfizer edged onto our ‘most active by options volume’ market scanner late in the afternoon after some interesting trades went through in the January 2011 contract. At the 15 strike one investor initiated a sold straddle by shedding 10,000 calls for a premium of 2.05 as well as 10,000 puts for 3.60 apiece. The gross premium enjoyed on the trade amounts to 5.65 and is retained in full if shares settle at $15 by expiration. This trader is expecting shares to remain mid-way between the 52-week low for Pfizer of $11.62 and the 52-week high at $20.32. In contrast, a bullish investor purchased 11,500 calls at the January 20 strike price for 80 cents per contract. This investor is hoping to see shares rally by 49% over the next 2 years to arrive at or above a breakeven share price of $20.80.

HPQ – Hewlett-Packard Co. – Shares of the technology company have dipped slightly by less than 1% to $31.08. We observed a call-to-put ratio of about 3.0 which implies that call options traded three times for each put traded. However, the calls were nearly all sold. The November contract stood out with 8,400 calls sold at the 35 strike price for an average premium of 2.80. Another 11,000 calls were shed for 2.00 at the November 37.5 strike price. No open interest was previously recorded at either of these strikes, and therefore these calls were sold short by investors. Moving into the January 2010 contract, it appears that one individual sold 3,750 in-the-money calls at the 30 strike price for a premium of 5.50, while purchasing the same number of puts at the 32.5 strike for 5.80 apiece. This transaction leaves the trader with a net cost of 30 cents and a breakeven share price at which profits begin to amass on the downside at $32.20. Thus, the overall tapestry woven together by option trades depicted some species of large bear. One trade initiated in January ran counter to rest as one investor purchased 12,500 calls at the 32.5 strike price for a hefty premium of 4.35. Shares would need to rally by about 19% from the current price in order for the investor to breakeven at $36.85 by expiration next year.

EFA – iShares MSCI EAFE Index Fund – Shares of the index fund are off by 2% to $38.73. EFA climbed onto our ‘most active by options volume’ market scanner after a couple of straddles were sold in the April and May contracts. At the April 39 strike price 10,000 calls sold for 1.48 while 10,000 puts commanded a premium of 1.83 to the investor. The gross premium pocketed amounts to 3.31 for the trade and yields breakeven locations at $42.31 on the upside and at $35.69 on the downside. If shares were to settle at $39.00 by expiration this month, the investor would retain the full premium. One month further, the May contract had a straddle of equal volume sold at the 39 strike price, garnering a gross premium of 4.81. The larger premium creates a wider buffer around the strike price, yielding breakeven points at $43.81 on the upside and at $34.19 on the downside. The 4.81 premium is enjoyed along with the risk that shares could swing outside of the breakeven locations where the investor is exposed to losses.

C – Citigroup, Inc. – Citigroup’s triumphant rally has been replaced by a decline in shares of 1.6% to $3.07. Despite the fact that the share price is no longer skyrocketing upwards, option trades painted a bullish picture today. Trading volume was heavy in the June and September contracts where investors appeared to follow a common theme of buying calls and selling puts. At the June 2.5 strike price 28,000 in-the-money calls were scooped up for 78 cents each while 26,000 puts at the same strike were sold for 68 cents apiece. Similarly, the out-of-the-money June 4.0 strike price saw 25,000 calls picked up for 36 cents and 26,000 puts shed for 1.79 per contract. The September contract bore witness to a similar pattern, although with less impressive volume. Investors coveted 19,000 calls for 78 cents each at the September 3.0 strike price, and dispensed with 19,000 puts for a premium of 1.98. Finally, the September 4.0 strike had investors clambering for some 22,500 calls at a 53 cent premium while 19,000 puts were sold for 1.98 each. The interest in call options suggests that investors do not believe we have seen the end of Citigroup’s rally. Option implied volatility has come off sharply over the past two days from 182% to the current value of 144%.

AGN – Speculation over a potential takeover by GlaxoSmithKline PLC has injected upward energy into AGN’s shares, which have rallied by 10% to $47.68. The call-to-put ratio of 6.48 indicates that option traders have been heavily playing calls by more than six times to each single put in action. As we reported yesterday, investor interest in the April 45/50 strikes has continued today and spread further to the April 55/60 strike prices. Call premiums have been rising amid the AGN rally allowing early-bird traders to catch the worm. Activity at the now in-the-money April 45 strike price has exceeded existing open interest as investors purchase more than 4,300 calls for 3.11 out of the 8,000 lots traded. This indicates that some investors must be banking profits by selling the in-the-money calls. The largest amount of volume took place at the April 50 strike price where some 18,000 contracts changed hands. Investors were willing to pay 1.79 in order to pick up more than 8,400 calls at the 50 strike. Optimistic call buying was also observed at the April 55 strike price where 6,000 calls cost traders 1.05. Finally the April 60 calls, which command a delta that indicates a 13% chance of landing in-the-money by expiration, had over 2,600 calls snagged by bulls who shelled out 63 cents for the contracts. Option implied volatility has skyrocketed amid the potential buyout news from 51% to the current value of 71%.

VIX – CBOE Vix Index – What must investors be thinking? A 500-point rally in the Dow on Monday and still the volatility gauge can’t break-down below a 40 handle! The answer is that while equity prices might have overshot to the downside, the nascence of a beautiful baby bull market is being greeted with quite the degree of skepticism by most investors. One must remember that the essence of the VIX or any reading of volatility is that it depicts gyrations. Monday’s unexpected rally was equally unexpected and in and of itself is a reason to quote implied volatility right where it is today at 43.00. Option traders confirmed that the economy is hardly out of the woods on the back of the Geithner plan just yet as buyers looked to a rebound in volatility over the next month. Using April call options investors paid a 50 cent premium to lock into rights to buy volatility some 43% higher than it stands today at the 60 strike. Within the past two weeks those calls traded at a 90 cent premium as investors bought the fear-gauge.

LTD – Limited Brands Inc. – The specialty retailer has seen its shares capture modest gains of less than 1% to $8.77. LTD edged onto our ‘hot by options volume’ market scanner after one investor initiated a couple of bold transactions in the January 2010 and 2011 contracts. At the January 2010 20 strike price this trader appears to have sold 10,000 calls short for an average premium of about 7 cents, and then purchased 10,000 calls at the 20 strike price for 50 cents apiece in the January 2011 contract. The 43 cent net premium paid to establish the calendar spread infers that the trader does not see shares more than doubling before January, but does believe significant gains are possible in January of 2011. In order for the investor to breakeven by expiration in 2011, shares must rally by 133% to the breakeven price of $20.43. Slowly, slowly catchy monkey.

XHB – Homebuilders SPDR – Shares had rallied slightly this morning, but are currently off by about 0.75% to stand at $10.81. The ETF appeared on our ‘most active by option volume’ market scanner after one trader was seen taking profits by selling calls. At the June 12 strike price 45,000 calls were sold for an average price of 80 cents each. Looking at the existing open interest at that strike, the calls shed today represent about half of the 92,000 in open interest. It appears that nearly all of the interest was established on March 11, 2009 for an average premium of 40-45 cents per contract. Thus, if the 45,000 calls sold represent profit-taking by the same investor, he will have gained 35-40 cents on today’s trade.

SYK – Stryker Corp. – Medical device and implant manufacturer has seen its shares in need of more than one of its own implants recently, having reached a trough at $30.96. Today having shown signs of creating a double-bottom chart formation, shares are ahead at $33.17 while option traders attempt to pre-empt a recovery in fortunes as they scoop up call options expiring April and May. One media source attributes the gains to unsubstantiated chatter over a potential bid from Baxter International, whose $36 billion capitalization is three times that of Stryker. Traders paid around 1.00 for fixed buying rights on the stock at $35.00 while some sold higher strike 40.0 calls to partially offset the cost as they sought limited upside exposure. Volume of close to 6,000 calls almost equivalent to the existing open interest at the 35 strike traded today, while the 40 call traded twice as frequently to the ‘ask’ compared to the ‘bid’ on overall volume of 5,000 contracts. Open interest at that strike is just one third of that number. In the May calls at the 40 line an equal number of calls were bought as opposed to sold and volume totaling 2,600 contracts stacks up against just 136 lots of established investor positions.

IP – International Paper Company – The global forest products, paper, and packaging company has experienced a huge rally of nearly 12% to $9.12. Perhaps the jump in share price is related to the news released today that IP received its first tax credit in the amount of $71.6 million from the Internal Revenue Service. The check is related to the alternative fuel mixture produced and utilized at fifteen of the company’s mills from November to December of 2008. It has also been reported that IP will look to continue to reel in tax refunds based on its mill production and utilization of alternative fuel mixture. In options-land we observed bullish activity stemming from today’s rally. One investor appears to have sold 15,000 calls at the April 7.5, taking in an average premium of 1.78 per contract. The 15,000 lots were reestablished at the October 10 strike price where 15,000 calls were purchased for 1.85 each. This investor paid about 7 cents to roll his position forward by 6 months and up to a higher strike price. Shares will need to rally by 10% from the current share price in order to reach the breakeven on the trade at $10.07 by expiration. Further optimism was seen at the April 12.5 strike price due to the purchase of 2,000 calls for 15 cents apiece.

TGT – Target Corp. – Shares have slipped by approximately 1.5% to stand at $32.63. Despite the share price decline, one investor established a bullish call spread in the July contract. It appears that 5,000 in-the-money calls were purchased for 5.80 each at the July 30 strike price, while the July 40 strike saw 5,000 calls sell for a premium of 1.35 apiece. The net cost of the trade amounts to 4.45 and positions this trader to breakeven at a share price of $34.45. By selling calls at the upper 40 strike price, gains are capped at a maximum of 5.55 if shares can rally to $40 by expiration. Shares of the retailer would need to rally by 23% from the current price in order to yield the maximum amount of profits to the investor.