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Options Intelligence Report: Barrage Of Bearish Plays Befall Airgas, Inc.

 May 19, 2010 04:39 PM

Airgas, Inc. (ARG) – Options investors initiated diverse bearish strategies on the distributor of industrial, medical and specialty gases this afternoon with shares of the underlying stock lower by 1.75% to $61.73 as of 3:15 pm (ET). Pessimistic players are likely wary of potential sharp share price erosion should Air Products & Chemicals Inc., the industrial gases maker forging a hostile takeover of Airgas in a proposed $5.1 billion bid for the company, fail to ultimately close the deal. Maybe bearish options investors are taking a cue from Paul Huck, CFO at Air Products & Chemicals, who yesterday stated, "there is a large drop in the stock price awaiting this, should Air Products go away" because "If we go away, who else is going to show up and pay this?" Airgas's share price, which is up roughly 39% since Air Products' offer went public ahead of February 5, 2010, would likely come crashing down if for some reason Air Products walks away given the lack of other serious competing offers for ARG at this time. Bearish traders bracing for potential share price hemorrhaging purchased a debit put spread and sold calls in the July contract and enacted a ratio bearish risk reversal in the October contract. One investor purchased 2,925 puts at the July $55 strike for a premium of $1.50 each, and sold the same number of puts at the lower July $50 strike for $0.65 apiece. Net premium paid for the spread amounts to $0.85 per contract, thus yielding maximum potential profits of $4.15 each if Airgas shares decline 19% to breach the $50.00 level by expiration day. The sale of 5,000 calls at the July $65 strike for an average premium of $1.05 each may or may not be the work of the same investor. Open interest of 19,000+ calls at the July $65 strike implies the call seller could be closing out a previously established long stance on the stock. Otherwise, the responsible party expects to keep the $1.05 premium per contract received on the sale as long as shares of the underlying stock do not exceed $65.00 ahead of July expiration. Finally, one pessimistic individual populating the October contract sold 5,000 calls at the October $70 strike for a premium of $1.28 each in order to buy twice as many puts – that's 10,000 lots – at the lower October $50 strike for an average premium of $2.55 apiece. The long put stance cost the investor an average of $3.82 per contract, and prepares him to profit should ARG's shares plummet 25.2% to breach the average breakeven point to the downside at $46.18 by October expiration.

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Quest Software, Inc. (QSFT) – Shares of the software development company surged 11% during the trading session to attain a new 52-week high of $19.65. Bullish options investors anticipating continued share price appreciation through expiration next month purchased roughly 2,600 calls at the June $20 strike for an average premium of $0.39 apiece. In the first hour of the trading session, optimistic investors picked up less than 1,000 calls for just $0.15 per contract. Fast forward to 3:50 pm (ET) – with 10 minutes remaining in the trading day, call buyers must now shell out 5 times that amount given the asking price of $0.75 per contract. Investors long the calls are positioned to make money if Quest Software's share price exceeds the average breakeven price of $20.39 by expiration in June. The surge in demand for options on QSFT boosted the overall reading of options implied volatility on the stock 47.6% to 45.14% just before the closing bell.

Ventas, Inc. (VTR) – Options activity on the real estate investment trust with a portfolio of seniors housing and healthcare properties in the U.S. and Canada indicates some investors expect shares of the underlying stock to trade within a specified range through June expiration. Ventas' shares are trading 0.40% higher on the day at $46.60 as of 1:25 pm (ET). Investors anticipating limited fluctuation in the Ventas' share price sold strangles. Approximately 6,000 calls were shed at the June $50 strike for a premium of $0.40 each in combination with the sale of 6,000 puts at the lower June $40 strike for a premium of $0.55 apiece.

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