WebMD Health Corp. (WBMD)– Shares
in the health information services provider dropped like a rock,
falling 32.0% to as low as $25.01 on Tuesday, on news talks to
potentially sell the company have ended, net income is expected to be
lower in 2012, and the CEO of the company has resigned. The steep
pullback in the price of the underlying saw heavier-than-usual activity
in WebMD calls and puts, with intraday volume rising to 14,800 in
early-afternoon trade against overall open interest of 29,100 positions.
Though some strategists engaged in bearish put buying in the name, it
appears much of the action was initiated by investors gearing up for a
potential rebound in the stock. Roughly 1.6 call options changed hands
on WebMD for each single put option in play thus far in the session.
Calls are most active at the Jan. $30 strike where more than 2,200
contracts traded against open interest of just 4 positions. Earlier this
morning, with shares hovering around $26.00, investors paid an average
of $0.35 per contract for the right to buy the stock at $30.00 by
January expiration. The modest intraday recovery since then has lifted
premium to buy the calls up to $0.50 as of 1:40 PM in New York. Traders
long the calls at an average of $0.35 each may profit at expiration if
shares in WBMD surge 13.25% over the current price of $26.80 to exceed
the average breakeven point at $30.35. Meanwhile, put buyers in the
front month at the $22.5 and $25 strikes may see the value of their
options rise if shares take another hit ahead of expiration next week.
Applied Materials, Inc. (AMAT)– A
large trade in Applied Materials call options launched the
semiconductor equipment company onto our ‘most active by options volume'
market scanner this morning. A transaction involving the sale of a
single block of 72,500 calls is by far the largest options position in
the name, and is hefty compared to the overall open interest on the
stock of 298,340 contracts. Shares in AMAT today rose 2.3% to $11.60.
The sale of the July $12 strike calls 72,500 times for a premium of
$0.78 per contract was tied to the purchase of 3,335,000 shares of the
underlying stock for $11.6152 each, on a 46 delta. The delta hedged
position, a synthetic short put, suggests the strategist is modestly
bullish on Applied Materials over the first half of the 2012. AMAT pays a
dividend, which the investor enjoys by holding the long stock, while
premium received on the sale of the calls acts as a buffer against
limited bearish movement in the price of the underlying. Shares need not
move at all between now and July expiration for the position to be
profitable given the quarterly dividend and the $0.78 premium received
on calls. Time decay works in the investor's favor as the call options
will expire worthless in July if shares settle below $12.00. The
strategy may result in losses, however, if the price of the underlying
slides sufficiently to overwhelm dividend income and premium on the sale
of the options at expiration.
Brocade Communications Systems, Inc. (BRCD) – Shares
in the maker of switches for data-storage networks rallied to their
highest intraday level in nearly six months on Monday after a Reuters
report said the company received bids from potential buyers. The stock
is up 1.2% today to stand at $5.84 as of 12:20 PM in New York. Activity
in Brocade Communications call options suggests at least one options
player is positioned for the price of the underlying to extend gains in
the first four months of the year. It looks like the investor initiated a
bull call spread for a net premium outlay of $0.825 per contract,
purchasing 5,000 in-the-money calls at the April $5.0 strike and selling
the same number of calls up at the April $7.0 strike. The trader stands
ready to profit should shares in Brocade exceed the average breakeven
price of $5.825 at expiration in April. Maximum potential profits of
$1.175 per contract are available on the position in the event that the
price of the underlying soars 20.0% to top $7.00 at expiration day.
Shares in the name last traded above $7.00 back on June 7, 2011.