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Bullish options strategy working after mattress merger lifts TPX

Tempur-Pedic International Inc. (NYSE:TPX) – Shares in memory-foam mattress maker, Tempur-Pedic International, Inc., jumped 23% to $32.99 on Thursday after the company said it will pay $2.20 a share or $229 million for private equity-owned Sealy Corp. in a deal that combines the two largest publicly-traded mattress companies.

Tempur-Pedic International Inc. (NYSE:TPX)

TPX options are more active than usual today on the news, with volume currently approaching 6,000 contracts by 11:45 a.m. ET versus the stock’s average daily options volume of around 1,500 contracts. One options trader who initiated a three-legged bullish play on Tempur-Pedic on Tuesday saw the value of the position rise substantially with the pop in the price of the underlying today. The strategist appears to have sold 500 puts at the Nov. $24 strike in order to partially offset the cost of buying a 500-lot Nov. $30/$35 call spread. The net cost of establishing the bullish stance on TPX on Tuesday amounted to $0.45 per contract, leaving the trader with an upside breakeven price of $30.45 and the opportunity to rake in as much as $4.55 per contract in profits provided shares top $35.00 by November expiration.

The sharp move in TPX shares Thursday finds premium required to establish the same three-way spread has since increased 360% to $2.10 per contract based on bid/ask prices available as of 12:05 p.m. ET. Trading traffic in TPX options today suggests the strategist is still holding onto the position. Finally, fresh positioning in front-month call options this morning indicates other strategists are taking a bullish stance on the shares. Upwards of 400 calls changed hands at the Oct. $32 strike versus open interest of 172 contracts. It looks like most of the calls were purchased for an average premium of $2.09 apiece this morning, providing buyers an upside breakeven price of $34.09.

Yahoo! Inc. (NASDAQ:YHOO)– A large bull call spread initiated on Internet media company, Yahoo!, Inc., this morning suggests one strategist is positioning for shares in the name to move higher during the next couple of months. Shares in YHOO increased as much as 2% to $15.92 on Thursday after coverage of the stock was reinstated with a ‘Buy’ rating and a 12-month share price target of $22.00 at Goldman Sachs. The largest position established in Yahoo options so far today was the purchase of a 10,000-lot Nov. $17/$18 call spread for a net premium of $0.12 per contract. The spread makes money if shares in Yahoo rally another 7.5% to top the effective breakeven price of $17.12. Maximum potential profits of $0.88 per contract are available on the position in the event that YHOO shares soar 13% to top $18.00 by November expiration. Shares in the Internet stock last traded above $18.00 back in May 2011.

Medtronic, Inc. (NYSE:MDT) – Medical device maker, Medtronic, Inc., popped up on our ‘hot by options volume’ market scanner this morning after a large number of far out-of-the-money calls changed hands. Shares in the name are up 0.70% as of 12:30 p.m. in New York to stand at $43.37. The stock traded up to a new two-year high of $44.04 earlier this week. Trading traffic in the Jan. 2013 $47 strike call this morning may mean traders expect the stock may continue to hit fresh highs by expiration next year. It looks like options players exchanged more than 5,000 of the $47 calls, purchasing much of the volume for an average premium of $0.55 apiece. Call buyers may profit at expiration in four months time in the event that Medtronic’s shares rally another 10% to top $47.55. The stock last traded above $47.55 in October 2008.

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.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

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