By Jud Pyle, CFA, chief investment strategist for the Options News Network
lowered its fiscal year 2010 guidance and also issued downside third-quarter earnings per share (EPS) guidance ahead of the opening bell this morning, sending the shares way down on the day. Call volume that has crossed the tape during today's session suggests at least one investor expects significant upside during the longer-term.
MON has dropped more than 7% to $48.77 on the day after the company lowered its FY 2010 guidance to $2.40-$2.60 compared to consensus estimates of $3.13. MON also said it expects third-quarter EPS to land between 75 cents and 80 cents compared to consensus estimates of $1.32 a share. But even though the stock is on the decline, at least one investor expressed bullishness and loaded up on LEAPS calls.
By 1:40 p.m. EST, more than 20,000 out-of-the-money (OTM) January 2012 70 calls had changed hands versus current open interest of just 3,600 contracts. This volume suggests investors most likely initiated these calls to open. A look at time and sales shows the investor most likely paid a net debit of $3.20 per contract, as the calls have dropped $1.25 on the day and are down less than the stock. Additionally, these calls have an implied volatility of 37% compared to the stock's 30-day historical volatility of 30%.
If MON shares are trading higher than the breakeven price of $73.20 at January 2012 options expiration, this long call trade could theoretically produce unlimited gains. The call buyers need the stock to rally at least 50% from its current level to make money on this trade. If MON shares remain below the breakeven, this long call trade caps any losses at the premium paid, or $3.20 per contract.
Keep in mind that if the price of the calls appreciate during the next year and half, whether or not the stock rallies, the investors could choose to sell back the calls to take profits instead of holding them until expiration.
Jud Pyle is the chief investment strategist for Options News Network (www.ONN.tv) and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.
Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."