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Lilly calls active as shares soar; Put spreads constructed on Verizon, AT&T

Lilly calls active as shares soar; Put spreads constructed on Verizon, AT&TEli Lilly & Co. (NYSE:LLY) – Shares in Eli Lilly, currently up better than 3.5% at $52.60, are rallying for a second consecutive day on encouraging results from a study of the drug maker’s experimental Alzheimer’s treatment. The stock is trading at the highest level since April 2008, and it looks like some options traders are positioning for shares in the name to extend gains, potentially taking out those five-year highs, by the start of the New Year. Bullish strategists looked to the Jan. 2013 expiry options, exchanging nearly 5,000 calls at the $52.5 strike by 11:40 a.m. ET, versus previously existing open interest of 500 contracts. Traders appear to have purchased most of the $52.5 call options for an average premium of $1.55 apiece this morning and may profit at expiration next year in the event that LLY shares exceed the average breakeven price of $54.05. Call buyers took to the Jan. 2013 $55 and $60 strike calls, as well. The $60 strike call has changed hands more than 1,500 times this morning against open interest of 340 contracts, with most of the volume purchased at an average premium of $0.10 each. Traders long the $60 calls make money in the event that Lilly’s shares surge 14% over the current price of $52.60 to top $60.10 by expiration in January. Eli Lilly’s third-quarter earnings report is just around the corner, scheduled for release on October 24th prior to the opening bell.

Verizon Communications Inc. (NYSE:VZ) – Bearish options activity on wireless provider, Verizon Communications, at the start of the session suggests one strategist is bracing for a bumpy fourth quarter. The stock is down 0.65% at $46.27 as of 11:55 a.m. in New York, with six full trading sessions to go before the company reports third-quarter earnings next Thursday. The largest transaction in VZ options printed within the first 15 minutes of the opening bell in the December expiry puts. It looks like one strategist purchased a 5,000-lot Dec. $41/$45 bear put spread for a net premium of $0.58 per contract. The position may be a sizable outright bearish bet that shares in Verizon are likely to decline in the next few months, or could be a hedge to protect the value of a long position in the stock. The trade makes money if shares in VZ drop 4% from the current price to breach the effective breakeven point at $44.42, with maximum potential profits of $3.42 per contract available on the spread provided shares decline 11% to $41.00 by December expiration.

AT&T Inc. (NYSE:T) – Interesting, one minute after the 5,000-lot bear put spread traded in December expiry put options on Verizon Communications, Inc. (see snippet on VZ), a similar options combo transaction printed in AT&T puts expiring December of this year, as well. The put spread on AT&T also looks for shares in the name to potentially drop roughly 11% by year end. Shares in AT&T are fairing slightly worse than Verizon at present, down 0.90% to stand at $37.33 as of 12:10 p.m. ET. AT&T reports its third-quarter earnings on October 24th prior to the open, the week following Verizon’s announcement. The strategist behind the 5,000-lot Dec. $33/$37 put spread on AT&T today paid a net premium of $0.66 per contract and stands ready to make money on the downside should shares in the name slip 2.7% to breach the effective breakeven price of $36.34. Maximum potential profits of $3.34 per contract are available on the spread should shares in the communications company drop more than 11% to trade below $33.00 at expiration in December.

Caitlin Duffy
Equity Options Analyst

The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

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