News Corp. Options Predict Pie In Face for Bears

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News Corp. Options Predict Pie In Face for Bears
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News Corp. Options Predict Pie In Face for Bears

Today’s tickers: NWSA, OIH, FRX & NVLS

NWSA – News Corp. – The phone hacking scandal that dragged Rupert Murdoch’s media empire through the mud won’t stifle shares in News Corp. forever, by the looks of one massive transaction in long-dated call options this morning. Shares in NWSA dropped more than 25.0% to as low as $13.38 in the weeks following well-publicized allegations that News of the World hacked murder victim Milly Dowler’s mobile phone. Efforts by Murdoch & Murdoch to apologize for actions they said occurred without their knowledge at the company’s tabloid, as well as other steps taken recently to soothe investor concerns, helped shares in NWSA recover in August. The stock still stands roughly 14.0% off its highest point in July, after slipping 1.3% during today’s session to $15.98 as of 12:00 pm in New York.

Huge prints in January 2013 contract call options on the media company within 30 minutes of the opening bell today suggests one big player sees shares in News Corp. not only recovering over the next year and a half, but also possibly rising to their highest since 2000. Just before 10:00 am ET, a QCC order to buy a 50,000-lot Jan. 2013 $20/$25 call spread at a net premium of $0.90 per contract was entered at the PHLX.

The QCC order, which allows valid and executable orders to immediately cross upon arrival with no auction, protects the anonymity of the trader and involves a stock component executed away from the Exchange on which the options were crossed. It is unclear what the stock component is at this time, but it’s worth noting that such knowledge could alter one’s interpretation of the transaction. Keeping that disclaimer in mind, it appears the call spread is looking for shares in News Corp. to trade substantially higher come expiration day in January 2013. The investor responsible for the spread stands ready to profit at expiration should shares in NWSA surge at least 31.0% to exceed the effective breakeven price of $20.90. Maximum potential profits of $4.10 per contract are available to the trader in the event that headlines on January 18, 2013 read: News Corp. shares up 56.4% since 8/19/11, at highest in more than a decade.

OIH – Oil Services HOLDRS – Big profits were swept off the table today by one options strategist that initiated a bearish stance on the oil service industry just two days prior. Shares in the OIH are down 1.2% this afternoon at $123.47 on the heels of 10.0% decline since Wednesday, and a more than 24.5% drop since the end of July. It looks like the trader purchased a 2,500-lot September $122/$130 put spread at a net premium of $2.15 per contract on Wednesday, which he today sold at a net premium of $3.70 per contract this morning to pocket net profits of $1.55 per contract in just 48 hours. The allure of additional profits, as well as the view that the sector may continue to struggle in the next few weeks, may have spurred the same trader to put on another bear put spread today. Roughly seven minutes after the spread was sold, it looks like a September $112/$120 put spread was purchased for a net premium of $2.31 per contract around 3,000 times. The options player profits at expiration next month if shares in the OIH decline another 4.7% to breach the effective breakeven point on the spread at $117.69. Maximum potential profits of $5.69 per contract are available to the put-spreader should the price of the underlying plunge 9.3% to $112.00 at September expiration. Shares in the fund last traded around $112.00 back in September 2010.

FRX – Forest Laboratories, Inc. – Shares in the maker of antidepressant Lexapro and other drugs dipped slightly this afternoon, one day after shareholders thwarted activist investor Carl Icahn’s attempt to restructure the New York-based company’s board. The stock rallied earlier in the session, but currently trades 0.25% lower on the day at $33.10 as of 12:30 pm ET. Long-dated put options on Forest Labs are more active than usual today, and although the stock has lost roughly 18.3% of its value since late-June, it looks like interest is selling. Approximately 5,000 puts changed hands at the Jan. 2013 $25 strike against open interest of 2,626 contracts. Nearly all 5,000 of the puts appear to have been sold for an average premium of $1.51 apiece. The trader selling the puts walks away with the full amount of premium in hand as long as shares in FRX exceed $25.00 through expiration day in more than a year. Shares in Forest Labs have not traded below $25.00 since June 2010, and have had no sustained period below that price level since the depths of the financial crisis. The investor short the puts has Theta working in his favor, and may also benefit from declines in implied volatility on the stock going forward.

NVLS – Novellus Systems, Inc. – Put selling, like the notable activity observed in Forest Labs this morning, was also the hallmark of options traded on Novellus Systems today. Shares in the San Jose, CA-based manufacturer of equipment used in the production of semiconductors are up 0.50% at $26.62 in early-afternoon trade. Nearly all of the volume generated in NVLS options centered in September contract puts. Trading traffic is by far the heaviest at the September $25 strike where more than 5,100 puts changed hands against previously existing open interest of 900 contracts.

It looks like one trader is responsible for selling almost all of the options to pocket an average premium of $0.70 per contract. The investor keeps the premium as long as shares in Novellus exceed $25.00 through expiration day next month. The past six months have not been kind to the stock, with the price of the underlying now trading at a 36.0% discount to its 52-week high of $41.82 set in March. But, shares in NVLS have traded above $25.00 since September 2010, and would need to decline another 6.1% from the current price of $26.62 to reclaim that level.

Caitlin Duffy

Equity Options Analyst

ibanalyst@interactivebrokers.com

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