Options Intelligence Report: Goodrich Petroleum Corp. (GDP) & Merck & Co. (MRK)
GDP ñ Goodrich Petroleum Corp.
Bullish and bearish investors populated the options field on the independent oil and gas company during the first half of the trading session. Shares of the underlying stock dipped 2% to $17.80 as of 12:40 pm (ET). Pessimistic players initiated a plain vanilla put spread by purchasing 1,000 lots at the May $17.5 strike for an average premium of $0.91 apiece, marked against the sale of the same number of puts at the lower May $15 strike for $0.17 each.
Net premium paid for the bearish transaction amounts to $0.74 per contract. Therefore, the spread yields maximum potential profits of $1.76 per contract should Goodrich Petroleumís share price plummet 15.75% from the current price to $15.00 ahead of May expiration. Investors start to make money as long as GDPís share price falls beneath the effective breakeven point on the spread at $16.76 by expiration.
Conversely, bullish investors engaged May contract call options to position for a rebound in the price of the underlying shares. Traders purchased 1,500 in-the-money calls at the May $17.5 strike for an average premium of $1.51 each. Goodrich Petroleum shares must rally 6.8% over the current price of $17.80 before in-the-money call buyers start to make money above the average breakeven point on the calls at $19.01.
Uber-optimists purchased 1,300 calls at the higher May $20 strike for an average premium of $0.66 apiece. Higher-strike call buyers stand prepared to accrue profits should GDPís shares surge 16% to exceed the breakeven price of $20.66 ahead of expiration day next month. Options implied volatility on the stock is up 13.6% to 57.03% as of 12:50 pm (ET).
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MRK ñ Merck & Co.
The global health care companyís shares are down slightly by 0.25% to $35.63 as of 1:05 pm (ET), but options activity on the stock suggests one investor expects a significant resurgence in the price of the underlying stock by expiration in January 2011.
It appears the bullish player enacted a buy-write strategy by selling 7,800 calls at the January 2011 $40 strike for a premium of $1.30 each, marked against the purchase of a large position in MRK shares. Shares at the time of the transaction were trading at $35.71. Thus, the trader effectively took ownership of the underlying shares at $34.41 each.
The short position in call options serves as an effective exit strategy for the trader should Merckís shares trade above $40.00 ahead of expiration day. The parameters of the buy-write transaction dictate maximum potential gains of 16.25% for the investor should the January 2011 $40 strike call options land in-the-money at expiration.
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