Today’s tickers: GE, TGT, XLI, CBST, HAL, DELL, XRT, CAL & JAVA

GE – General Electric – Shares have enjoyed a 2% rally to $10.98. GE jumped to the top of our ‘most active by options volume’ market scanner after one investor took a bullish stance on the stock. The trader sold 82,800 puts at the April 10 strike price for a premium of 33 cents per contract. This implies that he does not think that shares are going to fall beneath $10.00 by expiration in a few weeks. He pockets 33 cents in exchange for bearing the risk that shares fall beneath the strike price, which would see him breakeven by $9.67 at which point his premium will have fully eroded. Should the 10 strike land in-the-money by expiration, this investor could have 8,280,000 shares of the underlying stock put to him at $10.00. Established open interest at the 10 strike is 77,000 lots and so this would appear to be the work of fresh interest in the contract today.

TGT – Target Corp. – The retailer has had a slight share price rally of less than 0.5% to $36.18. Despite the modest rise today, a couple of investors were observed looking for a significant jump in shares heading into January of 2010. The first of two bullish trades was a sold straddle at the January 45 strike price. The sale of 2,600 puts for a hefty premium of 12.48 coupled with the sale of 2,600 calls for 3.08 yields the investor a gross premium of 15.56. He will retain the full 15.56 if shares can rally by 24% and settle at $45.00 by expiration. The second of the two trades was even more bullish. This investor established a bull call spread by purchasing 7,500 calls at the January 45 strike price for 3.10 each and by selling 7,500 calls at the January 55 strike for a premium of 1.02 apiece. The net cost to get bullish in the January contract amounts to 2.08 and yields a maximum potential profit of 7.92 if shares can rise to $55.00 by expiration. Shares would need to rally by 30% to the breakeven point at $47.08 in order for this investor to begin to garner profits.

XLI – Industrial Select Sector SPDR – Shares of the industrials ETF have risen just under 0.5% to $19.93. The XLI ticker jumped onto our ‘most active by options volume’ market scanner after one investor looks to have banked gains by selling call options in the April contract. The open interest at the April 20 strike price on the call side is currently at 263,459. We believe that this trader purchased 250,000 calls on March 18th, 2009, for a premium of 45 cents each. Today 125,000 calls were sold for a premium of 50 cents apiece. Thus, this investor has pocketed a net credit of 5 cents by selling the calls for 5 cents more than the price paid to purchase them. While a nickel per option contract may seem small, the aggregate of 5 cents multiplied by 125,000 options each representing 100 shares of the underlying stock makes for a pretty sweet payout of $625,000.

CBST – Cubist Pharmaceuticals, Inc. – The biopharmaceutical company attracted bullish options investors today amid a share price rally of more than 5% to $16.74. Perhaps the impetus for the call buying activity observed stems from unconfirmed takeover rumors reported by one news source this morning. Option volume has reached 24,000 which is nearly twice the open interest of 14,697 that exists in stock options. Investors looked for continued upside gains in the share price by purchasing 4,900 calls at the April 17.5 strike price for an average premium of 70 cents per contract. Even more bullishness was seen at the April 20 strike were 4,100 calls were picked up for around 59 cents each. Optimism spread to the May 20 strike price where an additional 1,400 calls were bought for about 69 cents apiece. Shares would need to continue to climb by just 4% more in order for the April 17.5 strike calls to land in-the-money by expiration. Option implied volatility has soared upwards on the takeover chatter from 63% at the opening bell to the current value of 97%.

HAL – Halliburton Company – A provider of a range of services and products for the exploration, development, and production of oil and gas around the world, has experienced a share price rise of about 2% to $16.65. Option traders’ keen noses have apparently picked up the scent of idle takeover chatter in one trading brief today. HAL reports its first quarter earnings on April 20th. Investors were hungry for calls and purchased about 5,300 at the April 17.5 strike for an average premium of 57 cents. More optimistic traders are hoping that shares make a more dynamic shift and were seen picking up more than 7,900 calls at the April 19 strike for about 21 cents per contract. The most brazen bulls looked to the April 20 strike and bought 1,600 calls for an average of 15 cent apiece. Volume was highest at the April 19 strike with more than 16,000 calls trading hands on almost zero existing open interest. In order for traders to profit from their purchases at that strike, shares would need to rally by 15% to the breakeven point at $19.21 by expiration. Option implied volatility on HAL has risen from 67% to the current reading at 72%.

DELL – Dell, Inc. – Shares of the technology have rallied by more than 6% to stand at $10.09 amid share price rallies on a number of tech-sector stocks today. The April 10 strike price had investors picking up more than 12,000 calls for an average premium of 32 cents apiece. The calls are now in-the-money as of 11:30am (EST), but would need to rise to the breakeven share price of $10.32 in order for traders to profit from these options by expiration. Our attention gravitated to the November contract where one investor dabbled in both calls and puts. At the November 8.0 strike price 11,150 puts were sold for a premium of 98 cents and spread against what appears to be a credit spread. The November 11 strike had about 5,000 calls trade to the middle of the market for a premium of 1.22 each and was spread against the purchase of some 5,000 calls at the November 12 strike for 92 cents per contract. Thus, it appears that this investor is optimistic that shares will remain above $8.00 but does not see shares rallying much higher than $11.00 by expiration. This is inferred by the fact that he is now short puts at the November 8.0 strike and short calls at the November 11 strike. The credit spread yields a net premium of 30 cents and can be added to the 98 cent premium on the sale of the puts for a combined premium of 1.28 for the investor.

XRT – SPDR S&P Retail ETF – After a jump higher in Thursday’s session retailers shares are once again on the rise this morning, with the ETF higher at $24.53. The rally for consumer stocks is at odds with the earlier gain in the unemployment rate to 8.5% today, the highest since November 1983. However, one option investor seems prepared to say to bearish sentiment in what appears to be a limited gain sold put butterfly. The trade involved the sale of 20,000 put options at the 18 and 22 strike prices combined with the purchase of 40,000 put options at the central 20 strike. Currently all three put strikes are out-of-the-money. If that remained the status at expiration in May, the investor would retain the entire 18 cent premium proceeds from the trade. This is a bullish trade in which the trader would be tripped up on a stagnation of prices. The worst case would be if shares fell to $20.00 at expiration in which case the maximum loss would be 1.82 per contract. The risk/reward on the trade is the wrong way round, but that depends on your posture. In addition those losses would disappear should shares fall to $18.18 and beneath the lower strike would once again take the full credit for the trade.

CAL – Continental Airlines - Class B – Major airlines have reported that traffic demand continues to decline in this recession and shares of CAL are off today by more than 1% to $10.26. The gloom surrounding the airlines industry spurred one investor to look for profits in the June contract. This trader initiated a credit spread by selling 5,000 calls at the June 12.5 strike price for 1.23 apiece and by purchasing 5,000 calls at the June 20 strike for 20 cents each. The net credit pocketed on the trade amounts to 1.03 and will be fully retained by the investor if the June 12.5 calls land out-of-the-money by expiration. The strategy caps potential losses to a maximum of 6.47 should pigs learn to fly and shares suddenly double to $20.00. This trade could of course have a long stock component, which would reduce that skewed risk reward.

JAVA – Sun Microsystems, Inc. – Shares have rallied a mere 2% to $8.39 today despite the dispersion of news that IBM is in the final stages of talks to purchase Sun Microsystems for $9.55 per share. JAVA appeared on our market scanner which tracks the ‘top option implied volatility losers’ during the trading day. Volatility has dropped significantly from 130% on Wednesday to the current value of 49% as investor uncertainty regarding IBM’s acquisition has diminished greatly. Given that talks are in ‘final stages’ volatility is still fairly high. Perhaps traders are reluctant to call the deal final just yet given Sun’s reported fears that “an antitrust review of the acquisition may last months”. Options activity reflected the decline in the buyout price to $9.55 per share from the previously released estimate of $10 to $11 by building up option volume at the 9.0 strike prices in the April, May, and July contracts. More than 25,000 calls traded hands at the April 9.0 strike for an average premium of 15 cents, while the May 9.0 strike and June 9.0 strike witnessed call volumes of just 7,000 and 5,000, respectively. Shares still need to rise by an additional 7% in order for the calls to land in-the-money by expiration.