PetSmart Option Trader Defies Analyst Downgrade

PetSmart, Inc. (PETM) - The leading retailer of pet food, supplies, and services in North America edged onto our ‘hot by options volume’ market scanner after a call spread was initiated in the September contract. Perhaps the more than 1% decline in shares to $21.67 today stems from the downgrade to ‘neutral’ PETM received at JPMorgan yesterday. Despite the decline in shares and the analyst downgrade, it appears that the trader responsible for the call spread is expecting the stock to improve by expiration in September. It looks as though 2,000 calls were purchased at the September 22.5 strike price for 84 cents each and spread against the sale of 2,000 calls at the higher September 25 strike for 20 cents premium. The net cost of the transaction amounts to 64 cents and yields maximum potential profits of 1.86 if shares rise to $25.00 by expiration. We have assumed that this trade is bullish given where shares are currently trading, but we also note that the calls traded to the middle of the market and could potentially represent a credit spread rather than the debit spread described above. A 7% gain in shares to the breakeven point at $23.14 would allow the investor responsible for the trade to begin to amass profits up to $25.00 at which point he will have realized maximum profits of 1.86 per contract or $372,000.

Best Buy Co., Inc. (BBY) - Shares of the specialty retailer of consumer electronics have dipped lower by less than 0.5% to $36.75. Despite the slight decline in the stock, option traders populating BBY today emitted a bullish glow. The near-term August 39 strike price had more than 4,500 calls picked up for an average premium of 33 cents per contract. Investors holding these options are hoping to see shares surge 7% to the breakeven point at $39.33 by expiration day next Friday. Additional optimism was seen at the December 37 strike where 1,000 calls were purchased for 3.60 apiece. Finally, investors wary of potential near-term declines in BBY scooped up 2,500 puts at the August 35 strike for 45 cents per contract. Profits

Akamai Technologies, Inc. (AKAM)- The provider of services for improving the delivery of content and applications over the internet appeared on our ‘most active by options volume’ market scanner this morning amid bullish options activity in the August contract. Shares of AKAM have rallied approximately 1% to arrive at the current price of $18.61. The August 19 strike price had 6,000 calls coveted for an average premium of 45 cents apiece by traders hoping for continued upward movement in the price of the underlying. The stock must climb at least 4% higher before investors breakeven at $19.45. Call action was also observed at the higher August 20 strike where 3,400 lots traded for 23 cents per contract. Another 1,700 calls appear to have been purchased at the August 21 strike for 15 cents each. Akamai would need to rally about 14% from the current price in order for investors long the August 21 strike calls to begin to amass profits at the breakeven point at $21.15.

The Kroger Company (KR) - The operator of retail food, drug, and department stores has experienced a 2% rally in shares during today’s trading session to stand at $21.24. The company received a new rating of ‘buy’ with a target price of $28.00 at Deutsche Bank yesterday. Bullish sentiment today stems from the fact that Kroger had its credit ratings at Standard & Poor’s placed on CreditWatch with positive implications. One investor responded to the positive news of late by initiating the purchase of 5,000 married puts. It appears that he purchased the underlying stock at approximately $21.16 and simultaneously picked up 5,000 puts at the September 20 strike price for an average premium of 45 cents apiece. The investor is now hoping for bullish movement in the stock. But, the puts protect the long position in case shares decline beneath the breakeven point at $19.55 by expiration.

Fifth Third Bancorp (FITB) - Shares of the bank holding company have rallied nearly 4% to $10.16 today, prompting one investor to enact a large-volume bull call spread in the January 2010 contract. The transaction involved the purchase of 20,000 calls at the now in-the-money January 10 strike price for a premium of 1.75 apiece spread against the sale of 20,000 calls at the higher January 14 strike for 45 cents each. The net cost of the spread amounts to 1.30 and yields maximum potential profits to the investor of 2.70 per contract if shares climb to $14.00 by expiration. Shares of FITB must rally 11% higher in order for the investor to breakeven at $11.30. At that point a 24% increase in the stock would ensure that the trader banks the maximum available profits of 2.70 for a total of $5,400,000.

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