Unusual Options Activity Review for Monday, January 14, 2013
Monday’s Bullish Trading
DELL saw a day of impressive options activity. Trading in the stock was orderly until about 2:00pm ET and then shares surged on a Bloomberg headline that the company was in talks with Private Equity firms about a potential buyout. DELL finished up $1.41 to $12.29 on surging volume of 113 million shares. Options volume jumped to 14X the daily average, with 172,000 calls and 46,000 puts traded in the name. January 12.5 calls, which are now 21 cents out-of-the-money and expiring in just four days, were the most actives. A whopping 58,855 contracts changed hands. Some investors might have been reacting to the news and, instead of buying shares outright, they took positions in options that give the right to buy (call) the stock for a set price (strike) through a specific period of time (expiration). The premium paid to enter the contract is at risk if shares hold below the strike price and the position is left open through the expiration. At that point, the contract expires worthless. An investor can also exit an options contract any time prior to expiration through an offsetting transaction. If the stock moves beyond the strike price, the contract is in-the-money. The breakeven of a long call at expiration is equal to the strike price plus the debit paid.
Bullish trading was also seen in Dryships (DRYS), Sears Holdings (SHLD) and Constellation Brands (STZ).
Monday’s Bearish Trading
Pulte Group (PHM) shares dropped 24 cents to $19.01 in relatively active trading of 8.6 million shares and options volume on the stock was 3X the daily average. About 19,000 puts and 4,400 calls traded on the homebuilder Monday. The largest trade was 9,400 April 19 puts for $1.40 per contract. At the end of the day, nearly 10,000 contracts changed hands against 442 in open interest. Deep out-of-the-money February $13 puts were the second most active in Pulte Group. 3,825 traded against 3,720 in open interest. It’s not clear what motivated the increased put activity in the name. Shares have jumped more than 150 percent over the past year and some investors with shares in the company are possibly taking positions in puts on concerns the stock might give back some of those big gains heading into earnings later this month.
Bearish trading was also seen in Lam Research (LRCX), Broadcom (BRCM), and DR Horton (DHI).
Index Recap
CBOE Volatility Index (.VIX) ticked .16 points higher to 13.52 and trading in the index slowed a bit from the brisk pace seen throughout much of last week. 328,000 calls and 149,000 puts traded in the VIX pit Monday. Trading is likely to be active Tuesday, however, as it is the last day to trade VIX January options before expiration Wednesday. Unlike most other contracts, VIX options expire on Wednesdays instead of the Saturday following the third Friday of the expiration month. As of Monday, there were 2.8 million calls and 1.5 million puts of open interest in the VIX. A stunning 2.77 million contracts, or nearly all, of the call options have strike prices of 14 or greater and would expire worthless if VIX settles at these levels (below 14) at the expiration Wednesday. On the flip side, only 1,759 of the January puts have strike prices of less than 13.
Analyzing the ETF Market
SPDR Homebuilders Fund (XHB) drops 11 cents to $27.66 and options volume on the ETF was 3X the daily average, after about 48,000 puts and 3,300 calls traded. Spread trading drove much of the flow. In afternoon action, 17,000 March 26 puts traded on XHB for 49 cents when the market was 47 to 49 cents. And 17,000 March 24 puts traded at 16 cents when the market was 16 to 17 cents. The spread, for a 33-cent debit, traded 21000X on the day and appears to be a bearish trading in the builders that will offer its best payout if XHB falls to $24 or less, through the expiration, which is a 13.2 percent drop over the next 60 days. An investor with a portfolio of names from the sector possibly initiated the spread to help hedge the risk of a drop in the building names in the weeks ahead.
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