IB Options Brief: Arch Coal, Inc. (ACI) & Ariad Pharmaceuticals, Inc. (ARIA)

Posted September 21st, 2011 by Caitlin Duffy in Unusual Activity

ACI ñ Arch Coal, Inc.
Coal stocks were hammered Wednesday after a number of industry players, including Alpha Natural Resources and Walter Energy, cut their production and sales forecasts. Analysts at Morgan Stanley cut the U.S. coal sector to cautious this week. Shares in Arch Coal plunged 9.2% to a fresh two-year low of $16.36 in early-afternoon trade, but one contrarian strategist populating November contract call options on the stock is prepared should shares rebound ahead of expiration.

It appears the trader snapped up 5,000 calls at the Nov. $17 strike for a premium of $1.81 each, and sold the same number of calls at the Nov. $23 strike at a premium of $0.20 apiece, paying a net premium of $1.61 per contract for the bull call spread. The investor profits at expiration in November if shares in Arch Coal climb 13.75% to exceed the effective breakeven price of $18.61. Maximum potential profits of $4.39 per contract are available to the trader should shares jump 40.6% over the current price of $16.36 to trade above $23.00 at expiration day in November.

The bullish play on Arch Coal, Inc. may work in the traderís favor should the coal producer surprise to the upside in its third-quarter earnings release ahead of the opening bell on October 31. Options implied volatility on Arch Coal is off its highest of the session, but remains sharply higher by 17.7% on the day to stand at 71.41% this afternoon.

ARIA ñ Ariad Pharmaceuticals, Inc.
The Cambridge, Massachusetts-based drug maker popped up on our ëhot by options volumeí market scanner this morning after a large chunk of put options changed hands in the Jan. 2012 contract. The big print in ARIA puts appears to be the work of one investor expecting shares in the pharmaceuticals company to exceed $6.00 through January 2012 expiration. Shares in Ariad Pharmaceuticals are up 0.70% at $10.31 today, ahead of the companyís presentation of updated Phase I data on ponatinib at the European Society of Hematology CML (Chronic Myeloid Leukemia) meeting in Portugal this week.

It looks like 6,000 put options were sold at the Jan. 2012 $6.0 strike this morning at a premium of $0.30 each, against previously existing open interest at that strike of just 438 contracts. The trader responsible for the put selling walks away with the full amount of premium as long as shares in Ariad top $6.00 come expiration day next year. Shares would need to nosedive between now and Jan. 2012 expiration in order for the investor to amass losses on the position.

The stock has dipped well below $6.00 within the most recent 12 months, and the short stance in the options puts the investor on the hook to potentially have 600,000 shares of stock put to him at an effective price of $5.70 each. Premium received on the sale of the puts protects the investor up to a point, but losses start to accumulate on the position if shares in ARIA plunge 45.0% from the current price of $10.31 to beach the effective lower breakeven point at $5.70 at expiration next year.

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