Thursday, February 18, 2010

Conseco (CNO) - Deep Calls Roll and What it Might Mean

CNO is trading 5.22; earnings are 2-25-2010 AMC. The LIVEVOL™ Pro Summary is below.

The company has traded over 22,500 options today in the first two hours on total daily average option volume of just 3,304. The largest trade has been the Feb 4/ Mar 4 call spread purchased for 0.10 (buy Mar / sell Feb) - no stock. The Company Tab and day's biggest trades snapshots are included (click either image to enlarge).

The Options Tab snapshot below (click to enlarge) illustrates what the trade is.

This closes the previous Feb 4 position and opens a new Mar 4 position. This occurs regularly with many stocks near expiration. It's called a "roll" - where the front month position is closed and rolled into the next month.

From the Level II pop out (click to enlarge) you can see the open interest in the Feb 4 calls jumped on 1-15-2010 (traded 1-14-2010) - which was also the Thursday before expo (just like today). The largest option trades from that day (1-14-2010) are also included (click to enlarge).

So why is this interesting if it's predictable? Since this trade occurs regularly, the unusual part would occur if the trade did not happen. In the pro world, for stocks where rolls are predictable, traders often believe that as call rolls continue, the stock's dwonside risk is limited. When the roll stops, the downside risk re-appears. Why?

The thought process is that if someone has done the research to own - in this case - 1.1 million shares (these are 95 delta options) and all of a sudden stops - it's probably not a good sign at the very least. There are many stocks which demonstrate rools - some calls, some puts, some deeps, some OTM (not as often). Each type can add a small ingredient to the overall analysis of the underlying movement.

The Charts Tab snapshot is included below for completeness. You can see that CNO can trade quite choppy up and down.

This is trade analysis, not a recommendation.

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