Monday’s Bullish Trading
Coca Cola (KO) might be a name worth watching Tuesday morning. Shares lost 10 cents to $38.13 and were among five Dow stocks to finish with losses Monday. Now, attention turns to the company’s earnings. Coke is among a handful of names to release results Tuesday morning, before the floodgates on third quarter earnings open Tuesday afternoon and remain open for the next few weeks. In options action, trading in the beverage company was busy Monday. 32,000 calls and 18,000 puts traded in Coke. October 38.5 calls, which are now 37 cents out-of-the-money and expiring at the end of the week, were the most actives in the name. 11,300 traded. Some investors might have been buying the calls ahead of the news and hoping for a post-earnings pop in the underlying stock. If shares rally to $38.51 or beyond, the contract is in-the-money and has intrinsic value (which is equal to the stock price minus the strike price of the call option contract). If shares hold at $38.5 or less, a call option with a 38.5 strike price consists only of time value (extrinsic value) and, if left open through the expiration, is at risk of expiring worthless because it is out-of-the-money ? unless it is at $38.50 exactly, at which point it is at-the-money and also expiring worthless.
Bullish trading was also seen in The Limited (LTD), RenRen (RENN), and Traveler’s (TRV).
Monday’s Bearish Trading
While some bullish-minded investors seemed focus on Coca Cola, a large bearish trade surfaced in Johnson & Johnson (JNJ) Monday. Like Coke, JNJ reports Tuesday morning. The stock was up 63 cents to $68.60 and among 25 Dow stocks to finish with gains. In options action, one investor was focused on the January 2014 long-dated puts on JNJ and apparently bought 10,000 of the puts at the 70 line for $6.54 per contract and sold 10,000 puts at the 55 strike at 99 cents. The Jan14 55-70 put spread, for $5.55, appears to be a new position. If so, an investor with a large stock position in the healthcare company might have initiated the bearish spread to help hedge the stock through the remainder of 2012 and through 2013.
Bearish trading was also seen in New York Times (NYT), Quicksilver (KWK), and Annaly Capital (NLY).
Index Recap
CBOE Volatility Index (.VIX) dropped .87 to 15.27 after the S&P 500 Index (.SPX) gained 11.54 points to 1440.13. Trading in VIX options was busy heading into the expiration. While most index contracts expire at the end of the week, October options on the volatility index expire Wednesday and the last day to trade is Tuesday. About 500,000 calls and 116,000 puts traded on the index. October 17 calls were the most actives. 57,275 traded. November and December 32.5 calls were busy as well, with more than 55,000 traded in each. Some investors might have been closing out positions in October calls before the expiration and then opening new positions in upside 32.5 calls in the November and December term.
Analyzing the ETF Market
The third largest options trade Monday was in the December Quarterlys on the iShares Small Cap Fund (IWM). Shares, which represent ownership in the 2000 names of the Russell 2000 Small Cap Index, jumped 54 cents to $82.64. In options action, a Dec 88 – 92 (1X4) call ratio spread trades on the ETF for 23 cents, 12300X. In this advanced strategy, it appears that 12,300 Dec 88 calls were bought on IWM and 49,200 Dec 92 calls sold. Since the focus is on the Quarterlys, the position seems to be a bullish view on the Russell 2000 Small Cap Index through yearend that has a max payout if shares reach the $92 strike by the end of the fourth quarter. However, this 1X4 might be a position adjustment. Open interest is sufficient to cover in the 88 calls. The big block of 92 calls, which was the third largest trade Monday behind a block of 59500 SPY Nov 150 calls and 56,160 QQQ Nov 71 calls, appears to be a new position.
——————————————————————————-
Disclaimers
This article is provided for informational purposes only. No statement in this article should be construed as a recommendation to buy or sell a security or to provide investment advice. The content provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy and completeness. optionsXpress makes every effort to provide timely information to its recipients but cannot guarantee specific delivery times due to factors beyond our control.
Derivatives involve substantial risk and are not appropriate for all investors. Please read the “”Disclosure Statement for Futures and Options”” prior to investing in futures or options.
For investments using a straddle or strangle options strategy the potential loss is unlimited. Multi-leg option strategies are subject to multiple commissions. Profits may be eroded by the commission expended to open and close the positions and other risks apply.