Wednesday, January 26, 2011

Alcatel-Lucent (ALU) - Front Month Calls Active on Popping Stock

ALU is trading $3.40, up 2.7% with IV30™ down 0.4%. The LIVEVOL® Pro Summary is below.


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ALU provides products, solutions, and transformation services offerings, which enables service providers, enterprises, governments and strategic industries (such as transportation or energy) globally to deliver voice, data and video communication services to the consumers.

The company has earnings on 2-11-2011.

The company has traded over 16,500 contracts in the first hour and a half on total daily average option volume of just 2,387. All but 117 contracts have been calls, yielding a 141:1 call:put ratio. The action is in the Feb 3.5 calls, which have traded nearly 15,000x. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the calls are mostly opening (compare OI to trade size). The existing OI of 6,167 is pretty large.

Looking at the Level II pop-out for the Feb 3.5 calls, we can see that the existing OI opened substantially on 1-14-2011 (one trading day before 1-18-2011). The Level II pop-out is included below.

Turning to the Time & Sales Tab for 1-14-2011 and those calls we can see that they traded $0.14 on a $0.05 x $0.15 market. So, in my opinion, opening long positions. That means the purchases today (I think they're purchases) are double downs.

The Skew Tab snap (below) illustrates the vols by strike by month.

It's interesting that the vol in the 3.5 line is lower in the front month (earnings month) than the second month. This peculiarity leads me to have a touch of doubt about the direction (buy or sell) of the calls traded today, though I still feel like they're purchases.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock has spiked up a few times over the last six months. In particular, it's gone from ~$2.90 to now around $3.40. On the vol side we can see that IV30™ is quite elevated relative to the short-term realized movement of this stock (HV20™) and the long-term realized movement of the stock (HV180™).

Possible Trades to Analyze
1. Copy Order Flow:
Buy the Feb 3.5 calls for $0.15. Even if the order flow is in fact a sale, the cheaper vol in Feb to Mar on an earnings cycle feels reasonable if you want to bet to the upside on a rallying stock.

2. A little trickier is to purchase the Feb 3.5 calls and sell the Apr 4 calls. If that can be done for $0.05, that's one way to play this. This will require a close on Mar expo though - probably don't want to be naked upside in this stock.

This is trade analysis, not a recommendation.

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