IB Options Brief: Time Warner, Inc. (TWX) & SPDR KBW Bank ETF (KBE)

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Time Warner Bull Channels Stock And Option Combo Play  

TWX ñ Time Warner, Inc.
A massive transaction combining Time Warner stock and options suggests one strategist expects bullish movement in shares of the media and entertainment company ahead of February expiration. Time Warnerís shares are currently trading 0.40% higher on the session at $33.30 as of 1:25pm.

The combo-player initiated a delta neutral trade, selling 1,400,000 shares of the underlying at $33.00 each, and buying 40,000 calls at the February $34 strike for a premium of $0.56 apiece, on a 0.35 delta. This is another one of those stock and option combinations in which the investor wants to have his cake and eat it too. The short stock leg of the trade works in the event Time Warner loses value, but should the shares jump, the value of the calls is intended to swell and outpace losses on the now losing stock price.

As the share price increases the delta on the calls moves higher meaning that the value of the calls appreciate at a faster rate leaving the investor better placed as a bull. In other words, gains from the rising value of the call options, given share price appreciation, will eclipse losses that accumulate from the short stance in TWX shares. Time Warnerís shares last traded above $34.00 back on May 30, 2010.

 

KBE ñ SPDR KBW Bank ETF
Large prints in March contract call options on the SPDR KBW Bank ETF this morning appear to be the work of one strategist taking profits off the table and extending bullish sentiment on the fund through expiration in a few months time. Shares of the KBE, an exchange-traded fund that replicates the performance of the KBW Bank Index and invests in regional banks and other diversified financial services industries, are currently down 0.50% to stand at $26.68 as of 12:30pm in New York.

It looks like the investor originally purchased a total of 27,100 calls at the March $26 strike, picking 20,000 lots for an average premium of $1.075 each on December 13, and buying another 7,100 calls at that strike for a premium of $0.70 apiece on December 8, 2010. The price of the fundís shares at the time of the original transactions ranged from a low of $23.75 to a high of $25.37. Today, the trader sold the chunk of 20,000 now in-the-money calls for a far richer premium of $1.60 each, and sold the other lot of 7,100 contracts for $1.75 a-pop. Net profits on the sale amount to $0.525 and $1.05 per contract, respectively.

Similar profit-taking behavior was observed at the higher March $27 strike where it looks like the investor originally paid $0.70 per contract on December 14, 2010, to buy 5,700 of the calls. Selling the contracts today for $1.20 apiece, the investor pockets net profits of $0.50 per contract.

Finally, the regional banks-bull extended optimistic sentiment on the fund by purchasing a total of 32,800 fresh calls up at the March $28 strike, paying $0.85 in premium for 12,800 of the contracts, and shelling out premium of $0.70 for the other 20,000 call options. The new long call position, which involves the same number of contracts overall as the original positions established back in December, prepare the investor to benefit from continued appreciation in the price of the underlying fund through March expiration.


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