Anadys Pharmaceuticals (ANDS) - Good Bet?

ANDS is a small pharma company (~$102 million market cap) with only 37 million shares outstanding. You can see the Livevol Pro Company Summary below:



From the Company Tab I see that ANDS averages 175 option contracts traded a day. On Wednesday, 3,163 contracts traded.... and ... ALL of those were Dec. 2.5 C purchases for a nickel against Open Interest of just 158. These are opening orders. The Company Tab and Option Tab snaps are below illustrating where I found that information (click images to enlarge).





Not that these numbers aren't enough to pique interest - how about this: On September 9 the company began dosing in Phase II ANA598 study (patients chronically infected with hepatitis C virus). It was supopsed to be a 12 week trial. 12 weeks from Sep. 9 gives me Dec. 2. Coincidence? I guess we'll find out. Either way, seems like a cheap bet.

Happy Thanksgiving to all.

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Micron Technology (MU) - Put Spreader

MU is trading ~7.50 with an hour to go in the trading day; pretty much unchanged. You can see the Livevol Pro Summary below.



There is some on-going lawsuit related to the EU and anti-competitive practices with RMBS that plays a role in this stock. MU averages ~16,000 option contracts a day and I saw two 21,000 lots and two 4,000 lots go up on the ticker. You can see the trades on the Company Tab (below; click image to enlarge). 25,000 Dec 6/7 put spreads purchased for 0.18.



The Options Tab below shows the volume with the OI (open interest) - the trade is at least in part opening.



What's the bet? If this is done without stock, this is simply a bearish bet costing 25,000 x $0.18 x 100 = $450,000 to try to win $2.5 million if the stock goes to $6. It's bearish, but not a bet on a complete collapse - otherwise the trade would have skipped selling the nickels (Dec 6 Puts) and would have just opened long puts naked. We'll see...

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Origin Agritech Limited (SEED) - Options Market Implications

SEED is up 75% today, and IV30^TM is up 77%. You can see the Livevol Pro Summary below.



The company is up on news that it received the "Bio-safety Certificate from China's Ministry of Agriculture as a final approval for its genetically modified phytase corn" (Click here for Source). With only 22 million shares in the float over 17.5 million shares have traded in the first 2.5 hours of trading (average stock volume is ~150k).

The average option volume is 112 contracts a day. The Company Tab snapshot below shows that over 44,000 options have already traded (that's not a typo). You can see that the option trades have been selling this vol and selling deltas (click image below to enlarge). There is also a possibility that this is an insider selling calls against stock they own.



Specifically, you can see the largest trades for the day - they have been the Dec 10 Calls. See the ridiculously high volume on the Dec 10 line from the Options Tab snap below (click image to enlarge).



A closer look at the largest trades from the Company Tab shows two trades about 10,000 contracts each selling Dec 10 calls on the bid (red coloring). Some smaller trades appear to have traded on the offer, but overall there are substantial sellers of this line (negative net deltas and net preium)



Might be an interesting issue to look at and possibly lead to some trading ideas. Looks risky as well. This is possibly going hard to borrow which may lead to a squeeze. If customers are selling, then market makers are getting long the gamma - so $10 could be a resistance level as well as a support.

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Barnes & Noble (BKS) - Poison Pill & Reversal

BKS is trading at ~ 22.60 as of Monday morning. You can see the Livevol Pro Summary below. Note that a dividend is forecasted for Dec expiration (this will be important to remember later; click on the image to enlarge it).



Taking a look at the Livevol Pro Options Tab, specifically the Dec 22.5 line you can see an unusual disconnect (click the image to enlarge).



The stock is hard to borrow (HTB) - meaning literally, finding long stock and borrowing is difficult because there is so much short interest (few long shares to locate/borrow and then short). HTB is not terribly unusual, but the rational for BKS is in fact quite unusual - leading to a potential trading opportunity.

BKS has a poison pill provision ("shareholder rights plan") which gets activated upon stock accumulation from an outsider. The reasoning: To protect against "efforts to obtain control of the Company that are inconsistent with the best interests of the Company and its stockholders."

"The rights will be exercisable if a person or group, without Board approval, acquires 20% or more of Barnes & Noble's common stock or announces a tender offer which results in the ownership of 20% or more of Barnes & Noble's common stock. ... If the rights become exercisable, all rights holders (other than the person triggering the rights) will be entitled to acquire Barnes & Noble's common stock at a 50% discount." (Click Here for Source)

Specifically, billionaire investor Ronald Burkle has been buying stock since early-mid November and now reportedly holds ~25% of the outstanding shares. I like the name "shareholder rights plan." Of course, this could be construed as undermining shareholders and entrenching management - tomato/tomatoe...

So what does this mean for the options? Looking back to the Dec 22.5 line you can reverse bid to offer the bad way (buying on offer, selling on bid) and receive money.

---
NB HINT: How did I know? Look at the IV values for the calls and puts above - they are completely divergent.
---

Sell Dec 22.5 Put @ 1.85
Buy Dec 22.5 Call for 1.20
Sell 100 stock @ 22.60

Receive = 22.60 - (Synthetic Long Stock)
= 22.60 - (Strike + Call - Put)
= 22.60 - (22.5 + 1.2 -1.85)
= 22.60 - (21.85)
Receive = $0.75

Take away the $0.25 dividend that short stock pays -->
Receive = $0.50

This implies -32% short rate to borrow stock to Dec expiration. If one is able to get slightly better prices than simply lifting the offer and hitting the bid, maybe you can receive ~$0.60.

In other words, if you can borrow the stock for less than 32% (38% if you receive $0.60 in the reversal), it's an arb - right?

Not quite. There are rights associated with the long shares (which the short shares have an obigation to deliver). This right implicitly has value - and is therefore also a part of the pnl calculation. Also, the rate can go more negative on your borrow, as the rate is not guaranteed day over day (amongst other things like buy in risk and REG SHO risk).

Of course, one could forgo selling stock and create a long position equivalent to purchasing 21.85 ($0.50 less than 22.60 market price after accounting for dividend). Sounds pretty good - unless... (1) Poison pill is swallowed; then the stock is cut by 50%. That would hurt. Or, of course, stock goes down below synthetic purchase.

This is an interesting event in an otherwise less than interesting market.

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Bank of America (BAC) - Massive Butterfly Trades in Jan 2011

I saw a huge trade go up in BAC on the ticker (lower left hand side of the application). It was 100,000 Jan 2011 30 Calls. You can see the ticker snapshot below.



When I looked at the Company Tab I saw that it was in fact one leg of a butterfly. Specifically, the trade was:

Buy Jan 2011 20/30/40 Butterfly for 1.20 vs selling stock at 16.10 with 20 delta. The Company Tab snapshot is below as well as the Options Tab (click on images to enlarge).





So what does that mean? Here's the analysis on the day of expiration in January 2011:

Sell 1 million shares of stock @ 16.10
Buy 50,000 Jan 2011 20 Calls
Sell 100,000 Jan 2011 30 Calls
Buy 50,000 Jan 2011 40 Calls

Paid $6,000,000 for the options ($1.20 x 50,000 x 100)
Break Even Low: 10.10
Break Even High: 22.475
Break Even Highest: 35.025
Max Gain: $30,100,000
Max. Loss: Unlimited. At $40 loss is $29,900,000.
The bet loses an additional $1,000,000 for every dollar the stock goes above $40.

This is a bullish bet unless BAC completely collapses below $10 or rips over $35.

You can see the pay off diagram below (click on images to enlarge):



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VeriFone Holdings (PAY) - Vol Jump and Put Buyers

We are adding about 30 new scans to Livevol Pro very soon. One of the news ones I am testing is greatest IV30 change day over day. You can see the first few results of the scan below and why PAY got my attention (click image to enlarge).



The Company Tab shows that PAY averages ~1,200 option contracts traded a day and that nearly twice that amount has traded in the first 3 hours. The tab also shows that people are getting long premium (vol) and short deltas (click image to enlarge).



The bottom half of the Company tab confirms this; we can see the largest trades for the day are puts trading on the offer (green coloring).



Finally the Charts tab displays how the IV30^TM has been increasing rapidly recently (the red line) vs the actual stock movement (the blue line is HV30^TM).



There is some interesting stuff going on with PAY. I found a good article about their trouble with the SEC: click here . Sounds like some super shady stuff.

This is probably not a good thing: "The facts in the SEC's complaint alone establish that CEO Douglas Bergeron and former CFO Barry Zwarenstein received internal reports disclosing 1Q07, 2Q07 and 3Q07 gross margins that were substantially less than the guidance they provided to investors; told VeriFone's supply chain controller, Paul Periolat, and others that the preliminary results were an "unmitigated disaster."

I leave the research up to the reader, but this is an interesting possible trade.

Legal Stuff:
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Ann Taylor Stores (ANN) - Massive Call Buyer; Takeover?

ANN is trading ~13.55 today, with four days (including today) to Nov expiration. You can see the Symbol Summary below. N.B. Earnings are Friday (BMO) of expo.



The company normally trades around 2,500 option contracts a day, but today it has already traded over 15,000 (three hours to go in the trading day). You can see the Company Tab below. N.B. ISE Sentiment tracking call open order purchases to puts - 47:1 in favor of call buying.



Even more interesting was that over 11,000 Nov 15 Calls were purchased. These are 26 delta calls with just 4 days to go before they expire! The stock volume (also on Company Tab) is actually a bit lower than average, so the likelihood that this is calls with stock is very low. This is a clear bet to the upside on earnings in my opinion. The Option Tab below shows the volume as of 1:00pm EST.



If you believe in order flow and following the delta bets - this would be one to examine. Possibly a takeover? You can also see LIZ earnings and the reaction ANN is having to them for further analysis.

Dress Barn (DBRN) - Vol Seller

DBRN is trading up about 8% today with earnings AMC on Thursday. The Company Summary snap is below.



The company averages just under 900 option contracts a day but as of an hour and a half into trading, nearly 5,000 contracts have traded. The biggest trade was a Dec 20 Call seller 1,300 times (over 100% of average daily option volume). You can see the Company Tab snap below. In total, over 2,200 Dec 20 calls have traded. I see that this trade was a customer selling because the price was 1.85 with a 1.80 x 2.20 market (very likely a seller since the price is so near the bid). Click the snap below to enlarge to see all the details above.




The historical volatility (the actual realized movement of the stock) relative to the option implied volatility (the "estimate" of volatility moving forward) are vastly divergent. You can see the Charts Tab below with HV20 (historical 20 day vol) in white vs. IV30 ^TM (implied volatility of hypothetical 30 day option) in red.



Looks like a trade with double rational. (1) Selling what seems to be high vol (and earnings vol). (2) Selling calls against a rallying stock (new price target $21) which is purchasing another company. I like the trade and the reasoning as I have justified it in my mind. And no, that was not me on the tape...

3Com Corporation (COMS) - Takeover (UPDATE)

Better safe than sorry. Discretion is the better part of valor. I would rather not got to jail?... Call it what you want, the big winner in the COMS option trades in the last blog has voluntarily cancelled the trades that would have netted in excess of $1,000,000 in one day.

The exchange was buzzing yesterday about the trades getting busted. Was is it a case of too obvious? Who knows, whatever the case, someone is volunteering to give up huge money to avoid what may have been an obvious investigation.

TIP OF THE DAY
So how could you know this happened without being on the exchange floor? Try this: Level II for the Nov 5 calls shows a decrease in Open Interest . This can only happen 3 ways:



(1) Closing trades
(2) Exercise
(3) Busted trades

There was not enough volume for closing trades yesterday (you can find this number in Livevol Pro a number of ways). Early exercise makes little to no sense; there is no dividend, the deal is in the future and who wants to kill free puts. So, it's gotta be a busted trade.

3Com Corporation (COMS) - Takeover

COMS closed yesterday at 5.69 (you can see the close below). Today they announce a takeover for $7.90 in cash by HPQ.



The company averages 803 option contracts a day, but yesterday traded over 8,000 for a 1000% increase in volume relative to the average over the last sixty trading days. Even further, 8085 calls traded and only 6 puts. That's a 1348:1 ratio. Hello?!



What were the trades? Was it at least a call spread? You can see the options tab below which shows 7300 calls traded on the Nov 5 and Dec 5 lines combined.



So was it a calendar spread? On the Options tab, by clicking on the green volume numbers, you can pull up the actual trades. I have put the Nov 5 and Dec 5 trades together below for ease of analysis. We can clearly see that the biggest trades are colored green - which indicates a purchase by a customer on the offer. Time & Sales shows us that the Nov 5 calls traded 0.65 on a 0.50 x 0.65 market and the Dec 5 calls traded 0.80 on a 0.65 x 0.80 market. That's a purchase on the offer as far as I am concerned.



So what? Well, what a surprise, COMS announces they are being purchased by HPQ for $7.90 a share in cash. So what's the net? Nov 5 calls ---> 2.90 (profit of 2.25 x 3961 = $891,225) and Dec 5 calls ---> 2.90 (profit of 2.10 x 3269 = $686,490). Total = $1,577,715 profit in one day. Uh oh...

Blue Coat Systems (BCSI) - Put Spread Trades

I saw a trade go up in the Ticker which also hit the scanner for high option volume. BCSI usually trades less than 2,000 contracts a day but a 7,500 lot spread went up within the first half hour. You can see the Company Tab with the average option volume and day option volume below (click to enlarge) as well as the Scanner Tab.





The Options Tab below shows the spread. Looks like someone bought the 25/22.5 put spread 1 by 2. In other words, they bought the 25 puts and sold twice as many 22.5 puts. This could be a bet that the stock goes to 22.5 or protection for long stock (among other things). The OI on both lines is very small relative to the order, so this was an opening bet (or opening hedge). You can enlarge the image below by clicking on it.

Black & Decker (BDK) - Nice Trade

As of seven minutes before the close yesterday, everything seemed quite docile in BDK. Average option volume, small stock move, pretty boring really...



Then, six minutes before the close, an opening order came in to sell 200 Jan 2011 55 Straddles @ 18.10 (13.1 in the puts + 5 in the calls). You can see the trade amount, price and time in the Time & Sales snapshot below (click the image to enlarge it).



That's a fairly unusual trade given the expiration date, strike and OI on the puts (15). The 200 puts sold 13x the prior OI. You can see the OI and volume on the Options Tab below (click the image to enlarge it).



Of course, all of the above is pretty trivial... Except that this morning BDK is trading at $58; a takeover. 200 straddles @ $18.1 is a $362,000 credit. Who knows, could be random, or an opening trade in 2011 on a $18 straddle, six minutes before the close in a stock that announces a takeover the next morning is... not luck? Let's just say this... it was a nice trade.

Amtrust Financial (AFSI) - Following Order Flow

I found AFSI using the scanner in Livevol Pro; specifically the high option volume scan; and now I am watching. You can see the image of the scan below.


The company is showing over 4,000% higher option volume than average. The company page, in the order flow section, also reveals the same unusual heavy activity comparing average option volume to today's option volume (see image below).


I immediately turned to the options tab where the vast majority of the order flow jumped off the screen. The Jun 12.5 Calls traded over 5,000 times, with zero OI implying that these option trades are all opening orders (new positions). Looking even further into the trades (using the sidebar trade list on the Options tab) I could see that these were predominantly purchases of the calls. You can see the green font indicating lifting of offers on the Options tab or the Time & Sales tab.



I did notice that the OI on the March and Dec 12.5 Calls went up on or around 10/6/09 as people seemed to make opening order sales (i.e. opening short orders). I saw this by investigatig the Time & Sales tab after peeking at the Level II quotes for those two strikes (Level II shows the OI charts; if you hold your mouse button down you can see the details). The image for the Dec 12.5 calls and the increase in OI are presented below. (there is a similar looking chart for the March 12.5 calls).


Even though there were what looked like opening order short positions on front 12.5 calls, the size of the opening order purchases in the Jun 12.5 calls is overhelming. I am not sure what is going on yet, but now, I am watching.

Amazon.com Inc. (AMZN) - Here Comes the Vol?

Taking a look at the 2 year IV30^TM chart for AMZN we can easily see how it tends to spike near earnings and then drop off. See the image below from the Livevol Charts Tab (click the image to enlarge).

This behavior is not that uncommon. Earnings represents a known news event that could affect the stock price more than average; that single day therefore should have a substantially higher expected volatility. This phenomenon is referred to as "earnings vol" by most professional traders.

What's more interesting about AMZN is how low it's volatility has gone recently. The images below are available by holding the left mouse button down on the vol chart in the Charts Tab.


The 2 year low in IV30^TM for AMZN has been 36 (on 5/16/2008). As of 9/18/2009 the IV30^TM hit 37. Since hitting that virtual support in vol (I drew in a yellow line illustrating the vol support in the image below), AMZN IV30^TM has begun to diverge from that low. See the image below (again, you can click the image to enlarge it; the red line is IV30^TM, the blue HV30^TM).


With AMZN earnings coming on or around 10/22/2009 and its tendency to demonstrate strong earnings vol, together with the fact that it has reached and bounced off of a 2 year volatility low, maybe this is just the beginning of a run up in AMZN volatility. It makes me wonder if maybe, "Here comes the vol"?

Caterpillar (CAT) - Doing your homework might pay dividends

-- written by "Lane"; Professional NYSE ARCA Options Market Maker

A quick glance at CAT’s dividend history shows a long steady history of quarterly dividends paid in January, April, July and October. More digging shows that over the past four years the stock has gone ex-dividend prior to the option expiration date every quarter. Furthermore, since January 2000, CAT has paid 39 quarterly dividends. Of those 39 dividend distributions, only four times has the ex-dividend date for the distribution been after the expiration date. That is some compelling evidence that CAT will go ex-dividend prior to October expiration. Feeling pretty confident that the ex-dividend date for October’s dividend is before October expiration? Even Bloomberg would tell you this is the case (image below is copyrighted by Bloomberg, and all that legal stuff).


What odds would you give me to take the other side?

After some significant research cross referencing the dividend stream on the Caterpillar website, here is what I have found. Dating all the way back to 1996, in October the dividend is consistently declared on the second Wednesday of the month. The shortest time period between the declaration date and the ex-dividend was not less than six calendar days after the declaration date.

What does that mean for the anticipated October dividend? The second Wednesday of October is October 14, I then add, at a minimum six calendar days to that and I am at an ex-dividend date not before the October 20, which falls after October expiration, October 16. Livevol is projecting the ex-date after Oct expo:


For comparison I looked for another expiration month which had dates similar to October 2009. I found April 2004. The second Wednesday of the month was the April 14, the dividend was declared on that day with an ex-dividend date of April 22 which fell after April expiration. My odds might be getting a little better.
How I am trading it.

I decided to isolate my trade as much as possible to a binary wager. There is or is not a dividend prior to October expiration. To do this, I chose to put on a reversal in October. Without getting terribly academic, if the market is pricing in a dividend amount greater than I am forecasting, then compared to my values, the market’s put values would be relatively expensive and its call values relatively inexpensive. This would lead me to buy calls, sell puts and sell stock (to remove the delta risk). These three trades are the three legs of a reversal.

Risk reward ratio
If the stock goes ex-dividend prior to October expiration and the dividend is $.42 then I would need to receive about $.42 in order to breakeven (before transaction costs) on a reversal, being short the stock I would be responsible for paying that dividend. If, however, the stock goes ex-dividend after expiration of my October position, any premium, above my transaction costs, I received to do the reversal would be profit.

When I started putting this trade on a little over a week ago, I was receiving about $.25 to reverse in October. Based on the closing marks in CAT from Friday October 2, 2009 the midpoint of the October reversal/conversion market was about -$.15. In terms of risk/reward for reversing, the risk is now approximately $.27 (.42 dividend -.15 received) to make $.15. The October reversal is laying roughly 2/1 on the trade right now. Is there greater than a 67% chance that the dividend is after October expiration? If so, then there is still edge in reversing for $.15, but the cost of being wrong is going higher.

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.