Unusual Options Activity Review for Friday, November 16, 2012
Friday’s Bullish Trading
Cheniere Energy (LNG) overcame morning losses and added 27 cents to $14.73 Friday. Shares of the Liquefied Natural Gas company have been grinding higher since Tuesday after a 7-day 13.1 percent drop. In options action Friday, volume in LNG hit 14X the daily average. 46,000 calls and 43,000 puts traded in the name. More than 70 percent of the volume was due to one combination play, in which the investor apparently sold 32,000 March 12 puts at 65 cents to buy 32,000 March 17 calls for 80 cents. The “risk-reversal”, for 15 cents, looks like a new position. The investor might view the recent drop in the stock as an opportunity for a bullish trade on LNG.This trader by selling the Mar 12 puts to open is willing to buy the underlying shares at $12 per share (100 shares for every put option) through the expiration. They are also opening a long position in the upside March 17 calls to participate in a move higher if LNG rallies through the first few months of 2013.
Bullish trading was also seen in MGM, TEVA, and MEMC (WFR).
Friday’s Bearish Trading
Energy XXI Limited (EXXI), a Bermudian oil and gas company, added 17 cents to $33.03 in relatively active trading of 1.8 million shares and finished 4.3 percent off its lows of the day. Options order flow on the stock seemed somewhat cautious or bearish, however, as 6,150 puts and 1,135 calls traded in the name. The activity was mostly focused on December 33 puts. 3,895 traded against 131 in open interest and the flow included several smaller lots traded for $2.25 per contract when the market was $2 to $2.25. It’s not clear what was motivating the increased activity, as there were no headlines in EXXI Friday. Shares are down about 11.7 percent in the past two months and some investors might be buying at-the-money Dec puts to help hedge the risk of further losses in stock positions.
Bearish trading was also seen in Ctrip.com (CTRP), Walter Industries (WLT), and NASDAQ OMX (NDAQ).
Index Recap
The S&P 500 Index (.SPX) added 6.55 points to 1,359.88 Friday, but lost 20 points on the week. Trading in the SPX pit was active during the last few days due to the expiration. Another 440,000 calls and 718,000 puts traded on the S&P 500. Interestingly, CBOE Volatility Index (.VIX), which tracks the expected volatility priced into S&P options, dropped 1.58 points to 16.41 on the day. For the week, the market’s so called “fear gauge” gave up 2.2 points. The decline in the VIX amid a 20-point drop in the S&P 500 is somewhat contrary to what one might expect. The volatility index typically moves higher when the market falls. Some investors are possibly looking for a rebound soon, however, as 448,000 calls and 186,000 puts traded in the VIX pit Friday, a ratio of more than two-to-one.
Analyzing the ETF Market
Puts on the PowerShares QQQ Fund (QQQ) were busy Friday. The exchange-traded fund erased morning losses to finish up 27 cents to $62.30. In options action, an investor sold 47,400 November 63.5 puts on QQQ at $1.75 cents per contract and bought 47,400 Weekly 63 puts (that expire on 11/30) for $1.69 cents each. They collected 6 cents for the spread. Looking at trade history, it appears that the big block of November 63.5 puts might have been opened for about 52 cents per contract on 11/8. QQQ is down from about $63.16 since that time and the position is being closed ahead of the expiration, while a new one is being opened in the options that expire in two weeks. If so, the strategist seems to be expressing the view that QQQ, which holds the same stocks as the NASDAQ 100, could see further losses through the end of the month.
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