- Goldman Sachs reiterated their buy on the homebuilders. They still like DR Horton and Meritage.
- Goldman removed RRI from their conviction buy list. The stock remains a buy, however.
- Credit Suisse downgraded Agnico-Eagle Mines to neutral from outperform.
- Call activity was heavy in a number of stocks:
HGSI – Human Genome Sciences, Inc. – Shares of the biopharmaceutical company made a miraculous recovery since yesterday’s slaughter by exploding 13.25% higher during the session to $20.40. Traders populated various contracts with bullish plays after HGSI was raised to ‘overweight’ from ‘neutral’ with a 12-month target share price of $25.00 at JPMorgan. Heavy call volume in the November contract was likely driven by traders anticipating results of Phase 3 trials employed to evaluate the efficacy of HGSI’s potential drug treatment for lupus, Benlysta. Trading at the November 20/25/30 strike prices mimicked the butterfly spread strategy, and suggests perhaps that traders expect shares to rise to $25.00 by expiration. Investors bought at least 3,500 calls at the November 20 strike for 1.88 apiece as well as purchased 3,500 calls at the November 30 strike for 60 cents each. These contracts effectively mimic the wings of the spread while the 9,000 calls sold at the central November 25 strike perhaps represent the body of the spread. Call spreads were initiated in both the December and January contracts. The December transaction, for example, involved the purchase of 1,000 calls at the December 25 strike for 2.60 each, spread against the sale of 1,000 calls at the higher December 30 strike for 1.00 apiece. The net cost of the trade amounts to 1.60 per contract. Thus, the investor may accumulate maximum potential profits of 3.40 per contract if shares of HGSI rally up to $30.00 by expiration day in December.
MSTR – Microstrategy, Inc. – The software company appeared on our ‘hot by options volume’ market scanner this afternoon due to bullish options activity. Investors initiated optimistic plays on the stock despite the 1% decline in shares to $73.03. Profit-taking action appeared in the January 2010 contract while fresh positions were taken in the April 2010 contract. It looks like one investor originally purchased 3,600 calls at the now in-the-money January 70 strike for an average premium of between 3.00 to 3.50 per contract back on July 31, 2009. Today the trader sold the calls for a whopping 7.20 apiece. Net profits enjoyed on the closing sale amount to a minimum of 3.70 up to 4.20 each. Thus, total potential profits earned by the trader are anywhere from $1,332,000 to $1,512,000. In the April contract a bullish risk reversal suggests investors expect the stock to rise significantly by expiration. The reversal involved the sale of 3,600 puts at the January 60 strike for 2.45 apiece, spread against the purchase of 3,600 calls at the higher April 85 strike for 3.70 each. The net cost of the transaction amounts to 1.25 per contract. Profits are available in the event that shares surge at least 18% to $86.25 by expiration day in April. We note that shares have not traded higher than $85.00 since April 30, 2008.
AA – Alcoa, Inc. – Shares of aluminum producer, Alcoa, recovered significantly today, rising 8% to $12.90. Bullish investors hoping the stock continues to rebound purchased call options in the December contract. Approximately 5,200 calls were coveted at the December 13 strike for an average premium of 69 cents apiece. Shares of Alcoa must rally another 6% before investors breakeven at a price of $13.69. Call volume at the January 14 strike exceeded existing open interest nearly two-fold. Approximately 32,700 calls were exchanged at that strike versus existing open interest of just 18,094. It appears some traders purchased 18,690 calls for an average premium of 76 cents each. A large percentage of the call volume represents fresh activity. Although some portion of today’s volume at the December 14 strike could be the work of investors closing out existing positions.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.