Friday Options Update: XLK, DELL, CBS, UNG, HRB, SUN

by: Andrew Wilkinson August 29, 2008 | about stocks: CBS / DELL / HRB / SUN / UNG / XLK    
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Rebecca Engmann Darst contributed to this report.

Technology Select Sector SPDR (XLK) – There has been some decent activity in the technology sector this week and once again we’ve witnessed another trade with intrigue. In the September contract a strangle involving the 23 and 25 strikes and 25,000 contracts. The combination appears to have been sold at around 55 cents and with an implied volatility reading of just 20%. The trader now needs the share price of the fund  - currently at $22.92 – to remain within the confines of a range bracketed by $22.45 and $25.55 at expiration in three weeks time. The open interest at these strikes is currently around 25,000 apiece and we’re wondering whether this investor might have already been long the strangle and so closing out a position. We’ll know on Tuesday when we see open interest numbers updated.

Dell Inc. (DELL)  – A slide in options implied volatility post-earnings today was accompanied by large selling of the September 25 calls as shares came off 12.8% to stand at $22.00. Puts at the 25 and lower strikes through 21 appear to have been purchased with traders drawing a line at the $20.00 mark as a floor under Dell.

CBS Corp. (CBS) – We noticed activity involving options on this media giant late in Thursday’s session and there is another episode in play today. The 50,000 lot trade raised a red-flag on our ‘hot by options volume’ scanner. The January 2010 contract saw this activity occur at the 20 strike – CNS shares are currently trading at $16.27. These calls appear to have been sold at a premium of 1.10. Curiously existing open interest at this strike is 51,868 contracts and some price research shows a 40,000 block initially established earlier this year in March when the premium was 5.3. It is hard to say whether these were bought or sold at that time. A long position being closed today is taking a large loss, but then again we don’t know whether this trade is tied to stock, which is most likely the case given the relative illiquidity in this series. Overall open interest is 211,434 contracts.

US Natural Gas Fund (UNG) – With Hurricane Gustav leaving the Caribbean and set to enter the Gulf of Mexico over the Labor Day weekend, energy traders have been keeping a keen eye on crude oil and natural gas prices. Activity in the sector fund tracking the price of natural gas is once again in focus today. It does appear that one trader is seeking further upside potential for gas prices having initiated a 3,000 bull call spread in the September contract using the 40 and 50 strikes. The trade costing approximately 1.20 in premium seeks a rally to $50.00 for the UNG fund. In this event the trader would breakeven at an underlying price of $41.20 and would make a maximum profit of 8.80 per contract at any price over and above the upper strike price.

H&R Block (HRB)– Despite a slide in the broader equity markets, it appears that yesterday’s announcement of a 5.3% dividend increase is helping shares in tax preparation company, H&R Block, buck the slide. Options volumes again raised a flag with around 10% of the overall open interest in play. Today’s trades are in the January and April contracts where investor have bought unusual amounts of call options implying further gains for the share price over time. With shares already at $25.72, at-the-money calls in January were purchased for 2.7 premium implying a jump to $27.70 by expiration, while April calls at the 30 strike were also purchased 6,500 times at a cost of 1.35. Exisiting open interest at this April strike stands at 1,374 lots implying fresh interest in H&R Block at this time. The likelihood of such a move from present valuation according to the option market is about one-in-three.

Sunoco Inc. (SUN) – With  shares 3% higher at $43.47, option traders have established a strangle strategy on this oil refiner, involving the surrounding strikes in the September contract at the 40 put and 45 call line. However, so many individual trades have gone through to both sides of the fence it makes it hard to determine whether the strangle is long or short. A long strangle costing 2.5 would require Sunoco’s share price to break below $35.50 or above $47.50 by expiration. Implied option volatility at 60% is unchanged overnight and we’re only guessing that investors might be trying to take advantage of the four-day weekend in the U.S. and the potential for dissipation of fears in the event that refineries don’t get knocked offline by Gustav.

 

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