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Morning Update

Yesterday there was unusually high call option activity in Direct TV. The largest trade of the day was the purchase of 8000 June 55 calls for $0.54 with the stock at 48.25. This is a bullish bet that DTV will be above 55.54, 15% higher, at June expiration. The stock is modestly lower on the year and is currently sitting near a level of technical support at 48.00. This trader is betting that this level of support holds and that the stock rebounds higher over the next couple of months.

Direct TV reported earnings on February 14th and gave investors a few reasons to be bullish. The company reported that revenues increased 8%, in line with expectations, and blew away the consensus EPS estimate of $1.03 by reporting $1.55. They also added 10.3 million new subscribers in Latin America during FY2012, which was the biggest driver of growth. Going forward DTV is betting that emerging markets will give them the best bang for their buck and are investing heavily in Latin America. Recently Direct TV has shown interest in acquiring Brazil’s GVT from Videndi. Direct TV already owns a majority stake in TV operator Sky Brazil and is familiar with the Brazilian market, and this deal would greatly increase their exposure to the region. The potential deal has already been cleared with Brazilian regulators and both parties are now negotiating a price.

Yesterday’s call option trade was likely a play on a few different factors coming together to push the stock higher. First, closing a deal with Vivendi for GVT at a favorable price is likely to drive share price appreciation for DTV between now and June. Second, the stock could test technical support at 48.00 and bounce higher off it. A technical bounce could give it the momentum it needs for others to hop on board and ride it higher. Of course both of these scenarios are far from a sure thing, which is why the stock is being played with out of the money calls so that risk is fixed and limited to $0.54.


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