Unusual Options Activity Review for Wednesday, November 28, 2012
Wednesday’s Bullish Trading
Hewlett Packard (HPQ) erased early losses and gained 3 percent to $12.73, leading the Dow Jones Industrial Average out of negative territory and to higher ground Wednesday. H-P shares have been volatile in recent weeks and slipped 12 percent last Tuesday on earnings news. Shares have been battling higher in the past week and are up 8.7 percent since that time. One player in the options market seems to expect the volatility to subside further through early-2014 and wrote a January2014 13 ? 15 strangle on HP at $3.93, 7500X. In this strategy, 7,500 $13 puts and 7,500 $15 calls (both expiring in Jan 2014) were sold at $2.79 and $1.14, respectively. It’s not really bullish or bearish trading, but seems to reflect expectations that shares will hold in a range through next year. The best payoff happens if shares settle between $13 and $15 through the Jan 2014 expiration and both contracts expire worthless. Since the options are both being sold (naked or uncovered) the risk to the short strangle is from a dramatic move higher in the underlying stock.
Bullish trading was also seen in Nabors (NBR), Hologic (HOLX), and Live Nation (LYV).
Wednesday’s Bearish Trading
Talisman Energy (TLM), the Canadian upstream oil and gas company, didn’t participate in the day’s rally. Shares lost 3 cents to $11.51. Options order flow on the stock was 9X the daily average and driven by a 19,700-lot of April 9 puts for 34 cents per contract. A buyer initiated the trade, according to a source on the exchange floor. At the end of the day, 21,993 contracts traded. Open interest in the April 9 put on TLM is 20,464 and the largest block of OI in the name. Looking at trade history, it appears that 20,000 April 9 puts were sold-to-open on TLM on 11/9. Shares are up nearly 7 percent since that time and it appears that the short put position is being covered Wednesday through an offsetting purchase. If so, the big premium purchase perhaps reflects expectations that the recent run higher in TLM has run its course.
Bearish trading was also seen in Herbalife (HLF), Teavana (TEA), and Diana Shipping (DSX).
Index Recap
CBOE Volatility Index (.VIX) saw morning spike to 16.98, but erased the gains to finish down .41 to 15.51 after the S&P 500 (.SPX) erased its morning losses and added 10.99 points to 1,409.93. Despite all of the media chatter surrounding the Fiscal Cliff, there’s been relatively little movement in the VIX this week and also light volumes in the index market. 544,000 calls and 457,000 puts traded across the S&P 500, VIX and other cash index products, which is only 70 percent of the daily average volume for the index market, according to Trade Alert data. Light volumes and falling implied volatility (VIX) seem to indicate that there is relatively little portfolio hedging activity taking place amid choppy market action in recent days.
Analyzing the ETF Market
Consumer Staples ETF (XLP) saw more activity than usual Wednesday. Shares, which represent ownership in Coke, Walmart, P&G and other consumer goods names, were up 34 cents to $35.72. Meanwhile, options volume was 2.5X the daily average after about 17,000 puts and 3,500 calls traded on XLP. January 35 puts were the most actives. 8,185 contracts traded. Another 6,000 January 34 puts also changed hands. Meanwhile, implied volatility was up 4 percent to 11.5. It’s not clear what was motivating the action. Some investors might be taking positions in January downside puts on XLP to hedge exposure to the consumer products companies through early-2013. XLP has been among the market’s winners in 2012, up nearly 10 percent year-to-date.
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