IB Options Brief: UBS AG (UBS) & McGraw-Hill Companies, Inc. (MHP)

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Call Buyers Shrug Off $2 Billion Disaster, Position For UBS Recovery Story

UBS ñ UBS AG
Switzerlandís largest bank said it may be unprofitable in the third quarter due to the staggering $2 billion in trading losses one of its employees racked up in unauthorized dealing. The news sent shares in UBS down as much as 11.6% to a two-year low of $11.21, but options traders appear to have largely shrugged off concerns and are betting on a rebound in the price of the underlying. Call buying and put selling on the stock appear to be the most oft-employed strategies of the day.

Investors expecting shares to recover in the next five weeks picked up roughly 3,100 calls at the October $12 strike for an average premium of $0.73 each. Call buyers profit if shares in UBS rally 12.5% over the stockís current price of $11.32 to exceed the average breakeven point at $12.73 by expiration day next month.

Meanwhile, put sellers targeted the October $10, $11 and $12 strikes, suggesting some investors expect shares to exceed those levels through October expiration. Traders pocketed an average premium of $1.27 per contract on the sale of roughly 615 puts at the October $12 strike. Premium received is money in the bank for sellers of the options as long as the contracts expire worthless next month. Longer-dated calls drew some attention, as well.

Investors snapped up around 2,000 calls at the December $12 strike for an average premium of $1.10 each. Traders may see the value of these calls appreciate if shares in UBS reverse course over the next few months to December expiration. The positions are profitable at expiration if shares exceed the effective breakeven price of $13.10.

 

MHP ñ McGraw-Hill Companies, Inc.
A burst of activity in McGraw-Hill call options minutes before 12:00 pm ET in New York caught our eye today. Trading patterns in September and October contract calls suggest one or more strategists positioned for the price of the underlying to extend gains enjoyed on the heels of the text book publisher and Standard & Poorís ownerís decision earlier in the week to split up the business in two. Shares in McGraw-Hill are up 1.6% this afternoon to stand at $44.15 as of 1:50 pm ET.

Roughly 1,000 in-the-money calls changed hands at each of the September $42 and $43 strikes today. It looks like buyers outnumber sellers of these contracts, although open interest is sufficient to cover volume in both cases. Fresh interest in calls is evident out at the October $45 strike where more than 1,700 contracts traded against open interest of just 283 positions.

Nearly all of the Oct. $45 strike calls appear to have been purchased at a premium of $1.90 a-pop. Investors long the calls profit if shares in MHP surge 6.2% to exceed the effective breakeven price at $46.90 by October expiration. Trading in McGraw-Hill Companies call options outpaced that of puts covering the stock by more than 14-to-1 in afternoon trade.


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