Schaeffer's Daily Option Blog

Potash Corp. of Saskatchewan (POT: sentiment, chart, options) has been popular in the options pits today, with call volume soaring to sky-high levels. The stock's July 120 call has seen more than 21,600 contracts change hands so far today, while its July 100, 110, and 130 calls have each seen more than 10,000 contracts cross the tape. After further research, however, it seems that the majority of the aforementioned activity is related.

At 11:40 a.m. Eastern time, the following changed hands: a block of 10,000 July 110 calls for $0.80; a block of 20,000 July 120 calls for $0.20; a block of 10,000 July 130 calls for $0.15. All three trades were marked "late," making it impossible to tell if they were bought or sold. Nevertheless, the bones of the trades appear to be a split strike butterfly (aka – broken wing butterfly, skip strike butterfly).

With this strategy, the trader would have bought the 110- and 130-strike calls, while selling twice the amount of 120-strike calls. In this case, the investor would've incurred a net debit of $0.55 ([$0.80 + $0.15] – [$0.20 x 2]). The objective of this slightly bullish option play is for the shares of POT to finish right at the $120 level (sold call strike) when options expire on Friday, July 17.

Heading into the close, the security is trading near the $97 level, a gain of $5.90, or 6.5%, from yesterday's close.

Bullish option speculators have swarmed Archer Daniels Midland Company (ADM: sentiment, chart, options) today, with call volume soaring to roughly seven times the norm. More specifically, according to data from WhatsTrading.com, the agricultural issue has seen more than 3,100 calls change hands so far today, compared to its average intraday volume of fewer than 500 bullish bets. The optimistic uprising echoes the recent trend on the International Securities Exchange (ISE), where speculators during the past couple of weeks have bought to open more than twice as many ADM calls than puts.

Digging deeper into today's unusual call volume, it appears we've discovered a September-dated spread strategy centering on ADM. Early this morning, a block of 1,500 September 29 calls and 1,500 September 32 calls changed hands, with both blocks marked "spread." The 29-strike calls crossed the tape for $0.98, closer to the ask price at the time, suggesting they were bought. Meanwhile, the 32-strike calls traded for $0.28, closer to the bid price, implying they were sold.

By initiating a long call spread, the trader is betting the shares of ADM will be at or above the $32 level by September expiration. However, they're not confident enough to buy a lone call on the stock – hence the sold call, which limits the investor's risk and helps offset the cost of the call purchase.

At last check, the stock was lingering near the $26.77 level, down 80 cents, or 2.9%, from yesterday's close.

Kraft Foods Inc. (KFT: sentiment, chart, options) was a popular target in the options pits on Wednesday, as the stock received a halo lift following a strong earnings report from sector peer General Mills (GIS). According to WhatsTrading.com, the consumer staples concern saw roughly 13,000 puts cross the tape, almost seven times its average single-session volume of fewer than 2,000 contracts. On the flip side, KFT saw about 6,600 calls change hands, more than doubling its average daily volume of 3,204 contracts.

Digging deeper into the data, it seems the stock was the center of a straddle strategy. At 1:04 p.m. Eastern time, several blocks – all marked "straddle" – totaling 240 July 27 puts and 240 July 27 calls changed hands. The puts crossed for $0.33, between the bid and ask prices, while the calls traded for $0.32, closer to the ask price at the time, suggesting they were likely bought. If so, the net debit on the position would be $0.65, or $65 (x 100 shares).

In order to profit, the straddle strategist needs the shares of KFT to rally past the $27.65 level (strike + net debit paid) or backpedal below the $26.35 level (strike – net debit paid) by options expiration on Friday, July 17.

In late morning activity, the stock is hanging out in the $26 neighborhood, a deficit of 60 cents, or 2.25%, from yesterday's close. From a longer-term perspective, the blue chip is poised to close the month atop its 10-month moving average for the first time since September 2008.

LEAP Wireless International, Inc. (LEAP: sentiment, chart, options) was pummeled by pessimistic option players on Wednesday, after a Piper Jaffray analyst said the wireless carrier could be hurt by increasing competition. According to data from WhatsTrading.com, the security saw roughly 4,200 puts change hands yesterday – nearly 6.5 times the stock's average daily volume of fewer than 650 bearish bets.

As a result, the equity's Schaeffer's put/call open interest ratio (SOIR) jumped higher overnight, from 1.15 (in the 62nd annual percentile) to 1.25 (in the 69th annual percentile). In other words, near-term traders have been more skeptically skewed toward LEAP only 31% of the time during the past year.

Most popular yesterday was the stock's July 30 put, which saw single-session volume of more than 1,500 contracts. Put open interest at the at-the-money 30 strike now stands at roughly 2,000 contracts. Nevertheless, the deep-out-of-the-money 12.50 strike remains home to peak put open interest in the front-month series, with 8,628 contracts in residence.

At last check, the shares of LEAP had surrendered $1.11, or 3.6%, to flirt with the $29.45 level. After underperforming the broader S&P 500 Index (SPX) by 15% during the past 60 trading sessions, the security is now in danger of closing the month beneath support at its 10-month moving average for the first time since February.

National Semiconductor (NSM: sentiment, chart, options) was the center of some heavy call buying on Wednesday, according to data from WhatsTrading.com. The stock had more than 10,100 call contracts cross the tape, which is nearly four times the equity's average single-day trading volume. Furthermore, roughly 81% of this volume changed hands at the ask price, indicating that the contracts were most likely purchased.

The most active call was the August 12.50 strike, as it added approximately 6,500 new positions. Open interest for this back-month option now stands at 18,035 contracts. At 11:36 a.m. Eastern time, several large blocks totaling 6,854 contracts changed hands at an ask price of $1.05.

Call trading has been brisk on the International Securities Exchange for NSM. During the past 10 trading sessions, nearly two calls have been purchased to open for every one put purchased to open. This ratio of calls to puts is higher than two-thirds of the readings taken during the past 12 months.

Furthermore, this increase in call trading caused the stock's Schaeffer's put/call open interest ratio to drop from 0.96 (in the 69th annual percentile rank) to 0.76 (in the 54th annual percentile rank).

Despite this optimism among options players, Wall Street is still skeptical of the shares. Zacks reports that 11 of the 15 analysts following NSM rate it a "hold" or worse, leaving ample room for potential upgrades.

Ford Motor Co. (F: sentiment, chart, options) has seen an increase in call trading recently, as optimism has been on the rise toward the automaker. Considering the fact that the stock has put in a solid performance in 2009 and proved to be a bright spot in yesterday's monthly sales report, this optimism toward the shares is to be expected. In trading on Wednesday, the stock saw more than 110,800 contracts change hands, which is more than double its average daily trading volume of 51,435 contracts. Of this volume, nearly 63% traded on the call side, according to data from WhatsTrading.com.

The Schaeffer's put/call open interest ratio for F stands at 0.49, as call open interest doubles put open interest among options slated to expire in less than three months. This reading is lower than 97% of all those taken during the past 12 months. In other words, short-term options players have been more optimistic toward the shares only 3% of the time during the past year.

The equity could still encounter some options-related resistance at the 6 level. This strike is home to more than 53,000 calls in the July series, making it the site of peak front-month call open interest. The July 7 call isn't far behind, with more than 48,200 contracts in residence.

Technically speaking, the equity has soared more than 158% since the beginning of 2009, but it is hitting short-term resistance at the 6.50 level.

On Wednesday, the company reported a smaller-than-expected 11% drop in U.S. sales for June. Ford's results continued its recent trend of increased market share - up three percentage points in June. The results by Ford further highlight the incremental signs of improvement the industry has been seeing recently.

Human Genome Sciences (HGSI: sentiment, chart, options) was the center of some brisk option trading on Wednesday, as more than 33,700 contracts crossed the tape. This volume is more than four times the stock's average daily trading volume of 8,136 contracts, according to data from WhatsTrading.com. Of that volume, more than 80% changed hands on the call side.

However, the stock's Schaeffer's put/call open interest ratio (SOIR) is sitting in the middle of the road, as traders are far from an optimistic extreme. The SOIR for HGSI rests at 0.44, which is in the 57th annual percentile rank. In other words, options players have been more optimistically aligned toward the shares 57% of the time during the past 12 months.

Meanwhile, short sellers have stocked up on the bearish bets when it comes to HGSI. During the past month, the number of HGSI shares sold short increased by 18% to 11 million, accounting for more than 8% of the company's total float. An unwinding of these pessimistic positions could fuel a significant rally in the shares.

Speaking of impressive rallies, the stock has soared more than 37% since the start of 2009. The equity has bounced off its March low of $0.57, gaining more than 400%. The security is now facing short-term resistance in the 3-3.40 region.

Shares of graphics processor manufacturer NVIDIA Corp. (NVDA: sentiment, chart, options) have been targeted by what appears to be a wave of front-month call buying today. Specifically, four blocks totaling 4,900 contracts traded on the equity's July 11 call shortly after noon Eastern time. The contracts crossed at the ask price of $0.80 on the NYSE Arca and were marked "spread." However, after much scrounging around, I was unable to locate the other half of this supposed spread position.

Putting the "spread" designation on the backburner, the total outlay for this trade as a standalone call position is $392,000. The trader needs NVDA to rally more than 4.5%, from yesterday's close at $11.29, to $11.80 at expiration in order to reach breakeven on the position. At last check, NVDA was up 0.8% at $11.38.

A major options trade took place just before noon today on the financial sector, with a trader piling into calls on the Financial Select Sector SPDR's (XLF: sentiment, chart, options) January 2010 11 and 15 calls. Specifically, a block of 20,000 January 2010 11 calls traded at 11:50 a.m. Eastern time on the International Securities Exchange (ISE) for the ask price of $1.96. Simultaneously, a block of 20,000 January 2010 15 calls traded on the ISE for the bid price of $0.40.

The result is a long call spread on the XLF, with a total outlay of $1.56, or $3,120,000. The maximum return on this position is realized if the XLF rallies to the 15 level by the time the options expire in January 2010. Currently, the XLF is trading just south of $12 per share.

Hewlett-Packard Co. (HPQ: sentiment, chart, options) has seen some unusual call activity today. The stock's August 42.50 strike has seen more than 11,000 calls change hands, compared to open interest of only 9,751 contracts. The majority of this volume traded in two large blocks, totaling 10,000 contracts, on the NYSE Arca at 12:37 p.m. Eastern time. The blocks changed hands for the bid price of $0.50, indicating that they were sold to open, and were marked "spread."

After some digging, I found the other half of this trade at HPQ's July 38 call. Four blocks, totaling 5,000 contracts, traded at the same time on the same exchange for the ask price of $1.77. The total outlay for this position, which appears to be a ratio diagonal calendar spread, is $1.27, or $385,000.

Diagonal spreads are frequently used as "roll" trades. In other words, the diagonal will often involve selling a short-dated option to close while buying a longer-dated option to open. Nevertheless, both legs of the trade can also be initiated simultaneously. Typically, as the shorter-term option expires, the trader will sell a back-month, near-the-money option, changing the diagonal spread into a regular credit spread.

Optimistic option traders have targeted Teva Pharmaceuticals Industries Ltd (TEVA: sentiment, chart, options) today, after the medicine mogul announced that the FDA approved the launch and marketing of its Tri-Lo Sprintec oral contraceptive tablets.

The most popular among the bulls so far has been the stock's August 50 call, which has already seen roughly 4,400 contracts change hands on open interest of fewer than 2,900. At 10:18 a.m. Eastern time, two blocks totaling 1,000 contracts – both marked "spread" – traded for $1.50, between the bid and ask prices at the time. On the flip side, two blocks totaling 1,000 August 50 puts - also marked "spread" – crossed the tape for $1.60, between the bid and ask prices at the time.

If all of the contracts were bought, we've likely uncovered a long straddle on TEVA. In other words, the option player is expecting a significant move on the charts from the stock, but doesn't know in which direction. The net debit for this straddle would be $3.10 ($1.60 + $1.50), making the lower breakeven point $46.90 (strike - net debit) and the upper breakeven point $53.10 (strike + net debit). In order to profit, the strategist needs the shares of TEVA to breach one of these levels by options expiration on Friday, August 20.

After touching a new high of $50.20 earlier in the session, the stock is now flirting with the round-number $50 level, a gain of 67 cents, or 1.4%, from yesterday's close.

Starwood Hotels & Resorts Worldwide, Inc. (HOT: sentiment, chart, options) was pummeled by pessimistic options players on Tuesday, after the firm was downgraded to "market perform" from "outperform" by Wachovia Capital Markets. According to data from WhatsTrading.com, the hotelier saw roughly 6,700 puts cross the tape, more than 2.5 times its average daily volume of about 2,600 contracts.

The most active option was the stock's July 22 put, which saw almost 4,200 contracts change hands. At 11:08 a.m. Eastern, two blocks totaling 4,000 contracts traded at the ask price of $1.10, suggesting they were bought. Around the same time, two blocks totaling 1,000 July 23 puts traded at the bid price of $1.55, suggesting they were sold. In other words, it appears we may have uncovered a put ratio backspread, which is the sale of a higher-strike put and the purchase of a greater number of lower-strike puts with the same expiration date.

Simply put, the backspread trader is betting the shares of HOT will tick lower before options expiration on Friday, July 17. The further the stock declines, the more money the strategist stands to make.

In late morning trading, the shares of HOT have surrendered 72 cents, or 3.2%, to linger just shy of the $21.50 level. From a more historical perspective, the equity is in jeopardy of finishing the week beneath support at its 10-week moving average for the first time since mid-March.

Auxilium Pharmaceuticals, Inc. (AUXL: sentiment, chart, options) was the center of an intricate option play yesterday, as a spread strategist bet on minimal movement from the stock in September.

According to data from WhatsTrading.com, the drug maker saw roughly 6,000 calls change hands, more than six times its average single-session volume of fewer than 1,000 contracts. The volume was more or less evenly split between four strikes in the September series: 30, 35, 40, and 45.

At 12 p.m. Eastern time, 500 September 30 calls and 500 September 45 calls crossed the tape for $6.04 and $1.06, respectively, both closer to the ask prices at the time. At the same time, the same amount of September 35 and September 40 calls changed hands for $3.52 and $1.98, respectively, both closer to the bid prices at the time.

Simply put, it appears the trader bought the 30-strike call, sold the 35- and 40-strike calls, and bought the 45-strike call for a net debit of $1.60 ([$6.04 + $1.06] – [$3.52 + $1.98]).

The objective of this long condor spread is for the stock to land between the sold call strikes (between 35 and 40, in this case) by options expiration on Friday, September 18. At last check, the shares of AUXL were flirting with the $31.15 level, a deficit of 24 cents, or 0.76%, from yesterday's close.

Bristol-Myers Squibb (BMY: sentiment, chart, options) may have been the focus of a short straddle on Tuesday. According to data from WhatsTrading.com, the security saw some heavy option trading, with more than 126,400 contracts changing hands. This volume was more than seven times the equity's average daily trading volume of 17,386 contracts.

In the July series, the stock's 22-strike call added approximately 7,000 new positions, pushing its open interest up to 10,712 contracts. At 12:14 p.m. Eastern time, the security saw a block of 6,250 contracts traded at $0.03, while another block of 750 contracts changed hands at $0.03. Both trades were between the bid and ask prices at the time.

Meanwhile, the July 22 put also added approximately 7,000 new positions, resulting in open interest of more than 8,700 contracts. At 12:14 p.m., a block of 6,250 contracts traded at a bid price of $2.10, while another block of 750 contracts changed hands at a bid price of $2.10.

In a short straddle, a trader collects a net credit when the trade is initiated and expects the stock to close right at the sold strike so that both options expire worthless, allowing him to retain the entire premium.

Overall, options players are relatively skeptical of the shares. The Schaeffer's put/call open interest ratio for BMY stands at 0.65, which is higher than 83% of all those taken during the past year. In other words, short-term options players have been more skeptical of the shares only 17% of the time during the past 12 months.

Wyeth (WYE: sentiment, chart, options) was the focus of some heavy option trading on Tuesday, as more than 142,900 contracts crossed the tape. This volume is more than 12 times the stock's average daily trading volume of 11,424 contracts. What's more, roughly 90% of that volume changed hands on the call side, according to data from WhatsTrading.com.

Digging into the front three months of options, the August series saw some heavy action. The August 45 call added approximately 5,500 new positions, resulting in open interest of 11,838 contracts. Meanwhile, the August 47.50 call and 50 call both added roughly 5,000 contracts each. Open interest for both strikes rests around 5,400 contracts.

Calls have been a growing preference for the pharmaceutical firm. The International Securities Exchange (ISE) has reported 10.2 calls purchased to open for every one put purchased to open during the past 10 trading sessions. This ratio of calls to puts is higher than 94% of all those taken during the past year.

In addition, yesterday's surge in call volume caused the stock's Schaeffer's put/call open interest ratio to drop overnight from 1.04 (in the 98th annual percentile rank) to 0.79 (in the 66th annual percentile rank).

Technically speaking, the shares of WYE are resting on support at their ascending 50-day moving average as they battle short-term resistance in the 45.50 region.