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U.S. stock market report

1446 ET 3Feb2012-Jobs report drives heavy action in Ford, GM options

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Better-then-expected U.S. nonfarm payrolls data last month has revved up

investor appetite for automobile stocks, driving shares in Ford Motor Co

up 4.3 percent to $12.79. 'Call options on the U.S. automaker are flying off the

shelves,' said Interactive Brokers Group options analyst Caitlin Duffy. Traders

exchanged about 200,000 calls and 48,000 puts in Ford, according to Trade Alert.

The largest transaction in Ford options appears to be a bull call spread that

yields maximum possible profits if the price of the shares rallies nearly 20

percent during the next few months to expiration, Duffy said. It appears one

trader bought a 30,000-lot April $14-$15 call spread for 15 cents per contract.

The position may be profitable at expiration if shares surpass the break-even

price of $14.15. Maximum potential profits of 85 cents per contract are

available on the spread if Ford shares surge 17.6 percent to exceed $15.00 by

expiration.

General Motors Co shares jumped 7.6 percent to $26.18 and its options

volume surged to 3.3 times the norm, with 76,000 calls and 43,000 puts traded,

according to Trade Alert. A debit put spread in the March expiration, which may

be an outright bearish bet that the rally is running on empty, or an attempt to

hedge a long stock position, stood out early on Friday. The trader apparently

responsible for the spread purchased a 4,000-lot March $22-$25 put spread at a

net premium of 67 cents. Profits, or downside protection, kick in if GM shares

breach the break-even price of $24.33 by expiration next month, Duffy said.

Maximum potential profits of $2.33 are available on the position if the stock

drops 16.5 percent to settle below $22.00 at March expiration, Duffy added. GM

is due to report results on Feb. 16.

Reuters Messaging: doris.frankel.reuters.com@reuters.net

1543 ET 3Feb2012-Goldman Sachs suggests buy Cisco calls ahead of earnings

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Goldman Sachs Group advised clients to purchase Cisco Systems Inc's

February $20 strike calls as shares would get a lift from expected strong

earnings.

Cisco, the world's biggest networking equipment maker, is slated to report

results on Feb. 8. 'The options market is bracing for more negative news than

our analyst expects,' GS derivative strategists said in a report this week.

'We'd position for calls to benefit from strong underlying fundamentals this

quarter.' The calls were offered at 58 cents based on a stock price at $19.80

earlier this week. The put skew for Cisco is elevated, suggesting that puts are

more expensive than calls, despite Goldman's view of positive near term

fundamentals, resulting in a beat this quarter, and the potential for management

to raise the company's outlook.

Over the past eight and four quarters, the median earnings swing for shares

has been 7.8 percent and 10 percent, respectively, in either direction. In half

of the past eight quarters, Cisco shares have realized double digit moves on

earnings. In a 2011 Goldman study of trading options around earnings, GS

strategists found a strong pattern of profitability for investors that bought

Cisco options ahead of earnings as the options market has tended to

underestimate the magnitude of the earnings move.

Reuters Messaging: doris.frankel.reuters.com@reuters.net

1430 ET 3Feb2012-UBS looks at Steel, Chemicals for potential pullback

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The S&P 500 index began the year strongly, with Materials leading the way,

said UBS Investment Research in a report this week. UBS derivative strategists

Mitchell Revsine and Brian Russo looked at two industries that outperformed

within the sector -- chemicals, excluding deal names and steel -- and suggest

option strategies to position for a potential pullback.

'Chemicals may be running out of gas,' they said. The strategists looked at

stock replacement strategies, where one sells an equity position that has

appreciated and replaces it with a call option. They suggest the purchase of

March calls in both Dow Chemical Co and Celanese Corp. 'The

strong performance of chemical stocks has been primarily driven by the dramatic

fall of natural gas and ethane prices, as well as some M&A activity,' UBS said.

'UBS Chemicals Analyst, Andy Cash, believes that while cheap shale gas may help

keep these names around current levels a bit longer, ultimately we are

approaching a peak in the profit cycle where owning chemical stocks has

historically not proven fruitful.' With implied volatility low and skew rich,

the strategists believe conditions are ideal for such a strategy.

They also said steel stocks could stagnate during February, and advised

clients to consider put spreads, which offer limited risk. 'Steel equities have

been on a great ride since late November, following price hikes and extensions

of lead times,' the report said. 'With recent imports potentially blunting the

rise in steel pricing and scrap pricing likely weak in February, Analyst Shneur

Gershuni would not be surprised to see short term investors take some profits.'

But he also expects momentum in pricing to resume later in the year and

maintains a positive outlook. These circumstances, along with low implied

volatility and favorable put skew, lend themselves toward hedging through March

put spreads, notably in Nucor Corp and U.S. Steel Corp. A put spread

involves buying a closer-to-the-money strike and selling a

further-from-the-money strike.

Reuters Messaging: doris.frankel.reuters.com@reuters.net

Keywords: MARKETS STOCKSNEWS

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