Weight Watchers Option Trade Makes $7.8 Million in Three Days

Thursday, 17 Feb 2011 12:07 AM

 

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A Weight Watchers International Inc. options investor earned a three-day paper profit of about $7.8 million after the stock surged the most ever today following the company’s higher-than-estimated forecast.

A block of 4,273 February $45 calls were purchased for 95 cents each on Feb. 14, when the stock closed at $44.08. Calls give the right to buy 100 shares, meaning the contracts cost about $400,000. The Weight Watchers calls jumped 20-fold to $19.30 at 1 p.m. New York time today, driving their value up to $8.2 million.

Weight Watchers surged 42 percent to a record $63.86 after the New York-based operator of diet centers said 2011 earnings will rise to $3.50 to $3.85 a share. Analysts projected $2.77, the average of estimates compiled by Bloomberg.

“It was either the luckiest trade in a year and a half or it was someone who had inside information,” said Ophir Gottlieb, head of client services at Livevol Inc., a San Francisco-based provider of options market analytics. He cited the choice of a contract that was the closest out-of-the-money call to the stock price, and the options having an open interest more than quadruple the size of any other contract.

Corey Kinger, a Weight Watchers spokeswoman, didn’t return a telephone call requesting comment.

The stock move had a statistical probability of less than one in a million based on the implied volatility levels before today, according to a report from Henry Schwartz, president of Trade Alert LLC, a New York-based provider of options-market data and analytics.

Call Volume

Overall call volume surged to a 20-month high this week before the company’s earnings report today. Trading of calls to buy the stock jumped to 7,008 contracts Feb. 14, compared with 13 puts to sell that changed hands that day and average daily call volume of 505 contracts in the prior four weeks.

The February $45 calls had an open interest of 7,401 contracts before today, the largest of all Weight Watchers contracts and about a third of all 21,756 contracts. The Feb. 14 trade helped boost open interest for calls to 15,681 from 9,264 the day before.

“The size and unusual nature of the call purchase definitely arouses some suspicion with it coming just three days ahead of earnings,” said Joe Kunkle, founder of OptionsHawk.com, a Boston-based provider of options market analytics. “But it also may have been someone protecting a large short position.”

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