Andrew Wilkinson is senior market analyst with Interactive Brokers, the professional’s gateway to the world’s markets.
Your intraday options trading update.
Verigy Ltd (NASDAQ: VRGY) — A sizable put spread on the maker of chip-testing equipment suggests one option strategist is prepared for shares in Verigy Ltd. to drop ahead of April expiration. Shares in Singapore-based Verigy are currently up 0.85% to stand at $13.03 perhaps after analysts at JPMorgan upgraded the semiconductor sector to ‘constructive’ from ‘cautious.’ The investor purchased 5,200 VRGY April 13 Puts for a premium of $1.00 each, and sold the same number of contracts of the lower VRGY April 11 Put at a premium of $0.25 apiece. Net premium paid to initiate the spread amounts to $0.75 per contract. Thus, the trader starts making money should Verigy’s shares decline 6.00% to breach the effective breakeven price of $12.25 ahead of April expiration day. Maximum potential profits of $1.25 per contract pad the investor’s wallet in the event that shares in VRGY plummet 15.6% from the current price of $13.03 to trade below $11.00 by expiration next month. Background – Verigy looked to acquire LTX-Credence Corp. (NASDAQ: LTXC) back in November in an all-stock deal that valued its takeover target at $500 million including net debt, but those plans may fall through as Japanese chip-testing equipment giant, Advantest Corp. (NYSE: ATE), extended its own offer to acquire Verigy at a substantial premium of $15.00 a share, up from an original bid of $12.50 a share, at the end of last year. The merger of Verigy and Advantest would form the largest manufacturer of semiconductor testing equipment in the world. Perhaps the put player populating Verigy today is prepared to see shares in the name drop if the deal with Advantest ultimately falls through in the next six weeks to April expiration.
American Eagle Outfitters (NYSE: AEO) — Call options on the casual clothing retailer are on trend with bullish options traders this morning ahead of the firm’s fourth-quarter earnings report, which is scheduled for release ahead of the opening bell next Wednesday. The 3.7% rally in AEO shares to an intraday high of $15.57 at the start of the session may have been spurred by yet another bout of renewed takeover chatter. Shares in American Eagle Outfitters are currently up 1.2% to stand at $15.20 as of 11:20 am in New York. Calls in the front month are most active today. Investors picked up more than 2,100 calls at the AEO March 16 Calls for an average premium of 48 cents per contract. Bullish players also looked to the AEO March 17 Call to purchase around 1,600 calls at an average premium of 24 cents. Traders long the calls are prepared to profit should shares in AEO rise above the average breakeven prices of $16.48 and $17.24, respectively. Bullish sentiment spread to the April 17 strike where some 1,800 call options were purchased for an average premium of 43 cents. Call buyers at this strike start making money if American Eagle’s shares surge 14.7% over the current price of $15.20 to surpass the average breakeven point to the upside at $17.43 by April expiration day. Options implied volatility (IV) on the stock jumped 12.2% to 51.71 in the first half of the session.
Fastenal Co. (NASDAQ: FAST) — Shares in the wholesale distributor of industrial and construction supplies are off slightly stand at $60.48 as of 11:40 am, but earlier increased to touch an intraday high of $61.15. The firm popped up on our ‘hot by options volume’ market scanner this morning after FAST-bulls scooped up call options in the April contract. Investors positioning for a substantial rally and new all-time highs for FAST’s shares by expiration next month may be placing bullish bets to speculate ahead of the company’s first-quarter earnings report on April 12. More than 4,400 FAST April 65 Calls traded on open interest of just 65 contracts. Nearly all of the contracts appear to have been purchased for an average premium of 76 cents a pop. Call buyers profit if shares in FAST jump 7.5% over today’s high of $61.15 to exceed the average breakeven price of $65.76 by April expiration.
Technology Select Sector SPDR (NYSE: XLK) — Bearish activity in options in XLK caught our eye this morning in the face of a 1.4% rise in the price of the fund’s shares to an intra-session high of $26.41. The purchase of a plain-vanilla put spread on XLK suggests one strategist expects shares to pull back in the months remaining to June expiration. Shares in XLK are currently up 0.6% to arrive at $26.20 just after 12:00 pm in New York. The pessimistic player picked up 5,000 XLK June 25 Puts for a premium of 73 cents each, and sold the same number of XLK June 22 Puts at a premium of 21 cents apiece. The net cost of the transaction amounts to 52 cents per contract (X $1), and positions the investor to make money should shares in XLK fall 6.6% by June expiration from the current price of $26.20 to breach the effective breakeven point on the spread at $24.48. Maximum potential profits of $2.48 per contract are available to the put player if shares in the fund plunge 16% to trade below $22.00 in the time remaining to expiration. Shares in the XLK have not traded below $22.00 since mid-September 2010.
