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Upside call buyers look for further gains in Travelers

Upside call buyers look for further gains in TravelersThe Travelers Companies, Inc. (NYSE:TRV) – The provider of commercial and personal property and casualty insurance products and services is the biggest gainer in the Dow Jones Industrial Average today, with shares up as much as 4.65% to hit a record high of $74.70, after the company reported third-quarter profits that handily beat average analyst expectations. The blowout earnings release sparked fresh bullish positioning in Travelers Cos. options this morning as some traders look for shares in the insurer to extend gains. Meanwhile, options players that snapped up TRV calls on Wednesday, prior to the earnings report, are enjoying sizable paper profits on those positions.

Traders anticipating higher-highs for TRV shares by the end of this week picked up around 1,100 calls at the Oct. $75 strike for an average premium of $0.22 apiece. These contracts have one full trading day remaining until expiration, and may be profitable should shares in TRV settle above the average breakeven price of $75.22 by end of day Friday. Upside call buying spread to the November expiry options where $75 and $77.5 strike calls are most active. Traders purchased around 600 calls at each strike in the first half of the session for average premiums of $0.95 and $0.30 apiece, respectively, and may profit at November expiration in the event that TRV shares settle above breakeven prices at $75.95 and $77.80. Paper profits on positions initiated Wednesday afternoon are available for the buyer or buyers of 800 of the Oct. $72.5 strike call at an average premium of $0.15 apiece. The now deep in-the-money $72.5 strike call currently displays a last-traded price of $1.70 per contract, an 11-fold overnight-increase in the value of those options. Finally, some strategists appear to be purchasing downside protection, notably the Nov. $72.5 and $75 strike put, perhaps to lock in gains on the impressive 25% increase in Travelers shares since June.

Ethan Allen Interiors Inc. (NYSE:ETH) – Shares in home furnishings manufacturer and retailer, Ethan Allen, are soaring today, up nearly 25% this morning to secure a new four-year high of $29.32, after the company posted higher-than-expected third-quarter profits. Options on Ethan Allen are far more active than usual, with volume reaching 750 contracts at midday in New York versus the stock’s average daily options volume of 31 contracts. One or more traders are furnishing their portfolios with upside calls on the name, with around 175 of the Nov. $30 strike call purchased this morning for an average premium of $0.70 apiece. Buyers of the Nov. $30 call stand ready to profit at expiration next month should ETH shares rally 7% over the current price of $28.70 to surpass the average breakeven point at $30.70.

Quest Diagnostics Inc (NYSE:DGX) – The provider of healthcare diagnostics and testing products and services snapped a two-day losing streak on Thursday, rising roughly 1% to $60.36 by 12:25 p.m. ET. Shares in Quest Diagnostics dropped 6% in the first half of the week after the company reported a 5% decline in third-quarter net income and a 3% decline in revenue versus the year ago quarter. One options trader appears to be adjusting a bearish put position on DGX. It looks like the strategist purchased 1,000 puts at the Oct. $60 strike for a premium of $1.10 per contract this morning. The puts make money if shares in Quest slide 2.4% to settle below the effective breakeven point at $58.90 by expiration this week. The purchase of the Oct. $60 put was tied to the sale of 500 puts at the Oct. $65 strike. The deep in-the-money $65 puts were sold at a premium of $5.85 per contract. Earlier in the week, another trade of 500 of the $65 puts sold for a premium of $2.30 each. These transactions together may represent the unraveling of the original bearish, or protective, stance on Quest Diagnostics at the $65 strike, while the purchase of 1,000 of the at-the-money $60 strike put today renews downside protection through October expiration.

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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