Thursday, October 1, 2009

CIT Group (CIT) - Mess with the Bull-Get the Horns

In the last post I showed the gambling man (or woman) selling $2,000,000 in premium in dime options over two days and sitting pretty as of Monday close. Oh my, how the tide has turned.

Yesterday CIT dropped 40% and the Nov 1 puts were active again... to the tune of a quarter million contracts on OI of 200,000 (see image from Options Tab below).

The Company Tab (image below) shows us that people were buying premium in options (Net Premium is positive) and getting short deltas in options (Net Deltas is negative).

With volume 50,000 higher than OI, opening positions were almost certainly being taken. Yet when looking at the OI today (image below from Level II on Options Tab) we can see that it actually decreased about 40,000 (from ~200k to ~160k). So 40k contracts closed net, AND there were opening orders on the line.

Net, net I see a massive closing from the original 200,000 short puts @ 0.10. Checking the Time & Sales Tab you can see a huge number of put purchases on that line for 0.35. Taking some liberties and asuming this is the same trader closing the dime sale, you are looking at a 0.25 loss on 200,000 options --> $5 mil. Now that's a lot of jack, no matter how much cheese you come to the table with.

The lesson... Selling dime options uncovered to open is a risky game. Mess with the bull, you get the horns.

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