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One DuPont (DD) Bull Grows Cautious Before Earnings

A DD call buyer exits his trade with earnings due next week

by 7/18/2013 1:37 PM
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It's been a big day for E.I. du Pont de Nemours and Company (NYSE:DD), otherwise known as DuPont. The shares have reached a new high of $57.88 -- their highest level since April 2000 -- following news that Nelson Peltz's Trian Fund Management acquired a significant stake in the company. Meanwhile, in the options pits, one DuPont bull opted to take leave of his own large stake in the diversified science and technology company.

Two blocks collectively amounting to 20,000 contracts traded in rapid succession this morning on the October 57.50 call, trading at or near the bid price for an average of $2.05 per contract. Trade-Alert reports that the transaction is likely selling to close a 20,000-contract block that was opened on June 14 for the ask price of $0.76.

During this period of just over a month, DD shares have gained slightly more than 9%. The option, however, jumped $1.29, for a quick profit of nearly 170%. (This is a good example of the principle of leverage that is afforded by options trading.)

This successful call buyer may have opted to take his profits off the table ahead of DD's earnings report, which is due next Tuesday. The company has been rather predicable in the earnings confessional -- topping expectations in seven of the last eight quarters -- but its post-report price action isn't exactly stellar. On average, DD shares have dropped 1.1% in the day after earnings, and edged up just 0.8% over the course of the following week.

Also of note is, DuPont's 30-day, at-the-money implied volatility reading, which spiked 5.1 percentage points to 23.6% (an annual high) in yesterday's trading. The equity's Schaeffer's Volatility Index (SVI) reading has also risen to an annual peak of 25%, suggesting short-term options are more expensive now than at any other time this year. These volatility measures are likely to implode once earnings hit the Street, however, which could be another reason today's trader hit the exits.

Finally, on the charts, E.I. du Pont de Nemours and Company (NYSE:DD) reached a new high earlier today, as noted, but continues to drift around the $57 level, and is currently perched at $57.37. This area has acted as a ceiling for more than two years, and could continue to challenge the shares in the near-to-intermediate term.


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