Perhaps
bearish sentiment pervades because the recent nose-dive in the price of
the underlying remains fresh in investors' minds. Plain-vanilla put
buying took place at the March $70 strike where roughly 10,500
contracts were purchased for an average premium of $3.83 apiece. Put
volume at the March $70 strike exceeds 17,600 lots, which trumps the
existing open interest level at that strike of 6,996 contracts. Put
buyers might be positioning to accrue profits to the downside should
Freeport's share price drop ahead of expiration. In such a scenario,
traders start to see profits if shares trade beneath the effective
breakeven price of $66.17. Investors might also be motivated to buy the
put options if they are holding long positions in the underlying stock.
In this case, put purchasers are building up downside protection to
hedge against further declines in the price of FCX shares.
CVS Caremark Corp. (CVS) –
A sold strangle involving 20,000 option contracts pushed CVS Caremark
to the top of our ‘most active by options volume' market scanner at the
start of the trading day. Shares are trading 0.75% higher to $33.17
today, but the short strangle play suggests one investor expects the
price of the underlying stock to remain range-bound through expiration
in August. The investor appears to have sold 10,000 calls at the August
$36 strike for a premium of $1.50 apiece in combination with the sale
of 10,000 puts at the August $30 strike for an average premium of $1.65
each. The gross premium pocketed by the strangler amounts to $3.15 per
contract. If shares trade within the strike prices described through
expiration in seven months, the investor keeps the full premium on the
transaction. However, the trader could be enacting a volatility play,
in which case he could choose to unravel the transaction ahead of
expiration if implied volatility declines. The short position in both
calls and puts leaves the investor vulnerable to losses if CVS's shares
fluctuate greatly going forward. Losses amass if the stock trades above
the upper breakeven price of $39.15, or if shares fall below the lower
breakeven point at $26.85, ahead of expiration day.
Standard Pacific Corp. (SPF) –
Options trading on single-family homebuilding company, Standard Pacific
Corp., jumped through the roof this morning as investors exchanged
8,815 contracts on the stock in the first hour of trading. The current
volume represents nearly 88% of the 10,033 contracts of total existing
open interest on Standard Pacific. Shares are trading 8.33% higher to
$4.16 as of 10:28 am (EDT). Bullish players are buying out-of-the-money
calls at the March $5 strike where roughly 5,000 contracts were coveted
for an average premium of $0.20 apiece. Call-buyers enjoy profits if
Standard's shares rally at least another 27% from the current price to
surpass the breakeven point at $5.20 by expiration in March. The
explosion in demand for options on the homebuilding firm pushed options
implied volatility up 20.93% to 99.23%.
The Dow Chemical Co. (DOW) –
Shares of chemicals and plastics manufacturer, Dow Chemical Company,
tumbled 6% to $26.91 in the first thirty minutes of the trading
session. The Michigan-based company posted earnings of $0.18 per share
for the fourth-quarter (excluding one-time items), which exceeded
average analyst expectations by about $0.07 a share. Positive earnings
were helped by strong emerging market growth, but the stock slipped
lower this morning on reports the chemical company's prices and volumes
declined in North America and Europe. Bearish option traders purchased
roughly 2,000 put options for an average premium of $0.35 apiece at the
February $25 strike perhaps because they expect Dow's shares will
continue to fall ahead of expiration. Profits accrue to the downside if
shares of the underlying stock edge 8.40% below the current price to
breach the average breakeven point on the puts at $24.65.
