IB Options Brief: Toronto-Dominion Bank (TD) & Canada Pacific Railway Ltd. (CP)

Posted March 1st, 2012 by Caitlin Duffy in Unusual Activity

TD ñ Toronto-Dominion Bank
A large spread in Toronto-Dominion Bank put options may be read as a sign of caution on the financial services provider despite the release of better-than-expected first-quarter earnings ahead of the opening bell this morning. It looks like one investor purchased a put spread that yields maximum possible profits if the shares sustain double-digit declines over the next seven weeks to expiration. Shares in TD Bank are currently up 2.4% on the morningís earnings beat and announced boost in dividend to stand at $83.45 as of 12:20 p.m. in New York.

The put player appears to have purchased 7,827 puts at the April $80 strike, selling the same number of puts at the lower April $70 strike, for a net premium outlay of $0.90 per contract. The transaction may represent an outright bearish bet that shares are likely to pullback in the near term, or a protective spread to hedge a long position in the underlying stock. Shares in the name have rallied an impressive 20.0% in the most recent three month period. Perhaps the spread represents an insurance policy on those gains in case the stock should falter.

The investor responsible for the transaction starts to make money ñ or realize downside protection ñ if shares in TD Bank decline 5.2% to breach the effective breakeven price of $79.10, with maximum potential profits of $9.10 per contract available on the strategy in the event of a more than 16.2% pullback in the shares to $70.00 or below by April expiration.

CP ñ Canada Pacific Railway Ltd.
Shares in the provider of rail freight transportation services rose 2.1% to $76.31 today, joining Canadian equities in rallying on the back of strong earnings reports and dividend increases from the countryís two largest lenders. Options activity on Canada Pacific Railway this morning suggests at least one strategist is positioning for the shares to extend gains and rally to fresh multi-year highs by June expiration.

Trading traffic in CP options is heaviest out at the June $75 strike, where more than 3,900 in-the-money calls changed hands against open interest of 2,621 positions. It looks like the majority of the call options were purchased for an average premium of $4.67 apiece. Call buyers may profit if shares in Canada Pacific Railway climb 4.4% to trade above the average breakeven price of $79.67 by June expiration. Shares in CP last traded above $79.67 back in July 2007.

----------------------------------------------------------------------------------------

Note: The material presented in this commentary is provided forinformational purposes only and is based upon information that isconsidered to be reliable. However, neither Interactive Brokers LLC norits affiliates warrant its completeness, accuracy or adequacy and itshould not be relied upon as such. Neither IB nor its affiliates areresponsible for any errors or omissions or for results obtained from theuse of this information. Past performance is not necessarily indicativeof future results.

This material is not intended as an offer or solicitation for thepurchase or sale of any security or other financial instrument.Securities or other financial instruments mentioned in this material arenot suitable for all investors. Any opinions expressed herein are givenin good faith, are subject to change without notice, and are onlycorrect as of the stated date of their issue. The information containedherein does not constitute advice on the tax consequences of making anyparticular investment decision. This material does not take into accountyour particular investment objectives, financial situations or needsand is not intended as a recommendation to you of any particularsecurities, financial instruments or strategies. Before investing, youshould consider whether it is suitable for your particular circumstancesand, as necessary, seek professional advice.