Unusual Options Activity Review for Friday, January 18, 2013
Friday’s Bullish Trading
Morgan Stanley (MS) saw a flurry of activity Friday on the heels of its earnings report. The stock was up $1.63 to $22.38 on heavy volume of 59 million shares and new 52-week highs after results beat Street estimates. Options volume was running 4X the daily average, with 178,000 calls and 90,000 puts traded on the stock so far. The largest trades were part of a spread, in which the investor bought roughly 30,000 April 24 calls on MS for 70 cents and sold 30,000 January 30 calls (that expire in 2014) at 60 cents per contract. The spread, for 10 cents, appears to be opening because volume exceeds open interest in both contracts. The investor probably has a bullish view on the stock, but rather than buying the stock outright, they are buying options that give the right to call the stock for $24 through the expiration. If they exercise the calls (which typically wouldn’t happen unless the stock was trading for more than $24 in the market), they would then be holding a covered call (long the shares and short the Jan 30 calls). Moreover, by writing the Jan 30 calls, they seem to be stating that they don’t expect the stock to see a dramatic move beyond that level through the Jan 2014 expiration.
Bullish trading was also seen in Sears Holdings (SHLD), Office Depot (ODP), and Applied Materials (AMAT).
Friday’s Bearish Trading
Arch Coal (ACI) was up 53 cents, or 7.5 percent, to $7.63 in very active trading of 28.5 million shares amid strength in the sector Friday. Other names in the space, like CNX, ANR, and JRCC, were also moving higher. Meanwhile, 21,000 calls and 27,000 puts traded on Arch coal so far Friday. The largest trade was a 20,000-contract block of February 7 puts on the coal producer for 25 cents per contract when the market was 23 to 25 cents. A buyer bought the puts, according to a source on the floor, and appears to be opening a new position. A total of 21,500 Feb 7 puts now traded on the stock against 1,393 in open interest. A shareholder with a large position in stock might have initiated the put purchase on concerns Friday’s rally won’t hold heading into the company’s earnings next month, on Feb 5.
Bearish trading was also seen in Huntsman Chemical (HUN), Monster Beverage (MNST), and AMD.
Index Recap
The plunge in the CBOE Volatility Index (.VIX) continues. The market’s so-called “fear gauge” lost another 1.18 to 12.39 and has dropped 45.6 percent in just three weeks. January 2013 options expired on the index Wednesday and the settlement value was 13.69. The index has dropped another 9.5 percent since that time. Since the index tracks the expected or implied volatility priced into a strip of S&P 500 Index (.SPX) options, the decline suggests that, all else being equal, the premiums for options on the S&P 500 have become much cheaper than three weeks ago. That fact doesn’t seem to be stirring up much activity in the SPX pit, however, as volume was relatively light. 443,000 puts and 299,000 calls traded on the S&P 500 Friday.
Analyzing the ETF Market
SPDR Retail Trust (XRT) adds 33 cents to $65.51 and notched new 52-week highs today. Meanwhile, 73,000 puts and 9,055 calls traded on the ETF, which is 3X the daily average. One spread drove much of the volume, as an investor apparently bought 30,000 March 64 puts on XRT for $1.13 and sold 30,000 March 60 puts at 34 cents each. The Mar 60 ? 64 put spread, for 79 cents, appears to be an opening position and one that would make its best profits if shares fall to $60 or less through the March expiration. An investor with a large portfolio of retailing names might have initiated the spread to help hedge the risk of a substantial market decline over the next eight weeks.
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