OPTIONS REPORT: Bulls Charge Airlines, Financials

7th Jul 2010 20:30

By Brendan Conway Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Strong airline traffic figures and a rosy forecast from State Street Corp. appeared to send bullish options traders running for contracts on airlines and several financial companies, mirroring Wednesday's optimistic trading in stocks. Delta Air Lines Inc.'s 4.2% traffic increase highlighted the strong June airline figures, prompting shares of several carriers to soar. Options traders took a particular shine to US Airways Group and Southwest Airlines Co. In US Airways, as the stock jumped 13% to $9.15, traders made a beeline for August $10 calls, picking up more than 10,000. At a price of 60 cents, the contracts make money if the stock surpasses $10.60 by Aug. 20. The company reports earnings in late July or early August, meaning buyers of the contracts stand to profit if earnings news sends the stock higher. Afternoon buyers of the contracts need a jump of 16% or so more to be in the black. Meanwhile, in Southwest, up 5.6% to $11.23, what Interactive Brokers identified as a large sale of August $10 put contracts crossed the tape. The trade amounts to a vote of confidence in the stock's current valuation. Pocketing 25 cents per contract, investors are signaling they see little chance that the stock will fall under $9.75 by the middle of next month. The airline reports earnings on July 29. At minimum, the expectation is for no significant bad news in the report. "Both these strategies give what looks like a pretty strong bullish slant," Interactive Brokers Equity Options analyst Caitlin Duffy said. The Southwest trader "will walk away with a quarter of a million dollars if things work out as planned," assuming airline stocks stay aloft. Elsewhere, State Street appeared to put the wind in investors' sails by announcing it expects to report a second-quarter profit well above analysts' forecasts. Financial stocks were among the day's top gainers, helping lead the Standard & Poor's 500 to a gain of more than 2%. Here, traders zeroed in on SunTrust Banks Inc. and Charles Schwab Corp. SunTrust has been the subject of intermittent takeover rumors, which were again circulating. A spokesman declined to comment. As SunTrust stock rose 7.2% to $24.24, trading was heavy in the bank's near-term July $24 and August $24 calls. At afternoon prices, the first contracts make money if SunTrust adds another 2.7% by July 16, while the second ones require a rise of 5.7% by mid-August. In Schwab, what appeared to be more bullish trading took place, with investors picking up a few thousand near-term July $15 calls. Paying the afternoon premium of 15 cents, buyers need the stock to surmount $15.15 by July 16 to make money. Schwab shares recently rose 6 cents to $14. The bulls didn't control all the action in financials. What looked like a sizeable protective trade crossed the tape in Comerica Inc. This investor set up what OptionsHouse Chief Investment Strategist Steve Claussen called a three-way spread of several thousand contracts that netted the trader a nickel per contract, in part by selling $40 calls. Comerica's stock reflected the day's optimism, rising 5.9% to $38 recently. But the options strategy executed Wednesday readies traders for the chance of a decline in the stock. It is often used by investors who own shares and works well as a zero-cost hedge, Claussen said. -By Brendan Conway, Dow Jones Newswires; 212-416-2670; [email protected] (END) Dow Jones Newswires July 07, 2010 15:30 ET (19:30 GMT)