Applied Materials (AMAT) - Apr Call Buyer

AMAT is trading ~ $14 today. The LIVEVOL™ Pro Summary is included below.



The company averages 12,640 options traded a day - today over 26,500 have traded with more than an hour to go in the day. Further, nearly 24,000 of those are calls for an 8:1 call:put ratio. The Company Tab snapshot below (click to enlarge) demonstrates this as well as the Net Deltas (positive) and Net Premium (positive) - the order flow has been buying options and getting long delta ---> Buying Calls.



The 7 largest trades of the day are all purchases of the Apr. 15 calls for 33 vol. The Options Tab snapshot illustrates that these are mostly opening orders - 18,620 volume vs 3,463 OI (open interest). Click either image below to enlarge.





Finally, the Charts Tab snapshot below (click to enlarge) illustrates the divergence between the IV30™ (red line) and the HV10™ (white line). However, you can also see that the prior earnings cycle yielded HV10™ of ~50%.



This is bullish in that it is a purchase of calls - but it's not uber bullish in that it deals in Apr. options. This could be a vol bet more than anything else. IV30™ does tend to be higher than current levels over the last 6 months in AMAT and VIX is now below 20.

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Mankind (MNKD) - Super Vol

MNKD is an $844 million bio-pharma trading ~8.28 (unched on the day thus far). The LIVEVOL™ Pro Summary is included below.



The Charts Tab snapshot below (click the image to enlarge) illustrates a couple of things.



(1) You can see the divergence between the IV30™ (red line) and the HV10™ (white line). That is, the stock hasn't moved much close-to-close recently, but the expectation is for a large move. The spread as of right now is 184 - 79 = 105 vol points. You can see all of the relevant HV and IV measures below (click to enlarge).



(2) The stock has traded with IV30™ above HV10™ before and in fact the implied vol under stated the actual stock move. i.e. that vol was a purchase rather than a sale though the divergence seemed to indicate the opposite. This is very common with bio-pharmas as the stock stays put until FDA or trail data is released and then the stock moves abruptly. For MNKD, the stock dropped significantly in Oct.

The relevant news is below (provided by www.theflyonthewall.com news service):
MannKind volatility elevated into PDUFA
MannKind closed at $8.28. MNKD is in discussions with FDA over Afresa product label reports Reuters. PDUFA date for AFRESA with the dreamboat inhaler is expected near January 16. ...

What's so intersting about that? As luck would have it, Jan 15 is the the third Friday of January - aka options expiration.

The Options Tab snapshot below (click to enlarge) demonstrates the Jan option markets.



I have highlighted the OTM options. Note the 12.5 calls are 0.10 bid on a 8.26 stock with one week to go to expo. The stock would have to move 51% in 6 trading days (excluding today) to get to 12.50. That's 329% annualized (based on 250 trading days). Similarly you can see bids in the OTM puts.

NOTE: I AM NOT SAYING THESE ARE SALES. This is just an observation and an illustration of vol in bio-pharma. Selling 0.10 options is generally a terrible idea.

A risky bet would be to sell some vol in Jan (probably not the baby options though) and buy the vol in Feb. If the PDUFA comes out after expo then you get to collect the high vol in Jan and have it pay for the vol in Feb which would hopefully be too cheap as it was before.

NOTE AGAIN: This isn't trading advice, it's just illustrative.

Of course, some scary stuff could happen. For example, if the data comes out after market close then you can't hedge what could be a dangerous short gamma position. Recall that on the day of expo, options are pure gamma - they're essentially not vol bets anymore. Also, short options leave the exercise decision to the option holder.

You could come in Monday with collapsed vol in Feb (paid too much) and having sold too cheap vol in Jan.

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Global Payments (GPN) - Risk Reversal Trades Pre-Earnings

GPN is a $3.4 billion electronic transaction processor. The LIVEVOL™ Pro Summary is included below. Note that earnings are a day away (AMC).



The Company Tab snapshot below (click to enlarge) demonstrates that over 5,200 option contracts have traded today on total daily average volume of 251.



The day's biggest trades and Options Tab snapshots (click either to enlarge) illustrate the action. Someone bought Jan 55 Calls and Sold Jan 50 puts for even (.0.60 vs. 0.60). The OI (open interest) is small relative to the trade sizes - these are mostly opening orders. This trade is called a risk reversal or more affectionately on the floor as a "risky."





This trade is essentially vega neutral. The Charts Tab snaphot below illustrates the divergence between IV30™ (red line) and HV30™(blue line). A vol increase into earnings is common for most stocks.



This is a big bullish trade right into earnings.

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Solarfun (SOLF) - Call Purchases with Reverse Skew

SOLF is a $260 million solar company in China. The LIVEVOL™ Pro Summary is below. Note that vol is up with stock up.



The company averages 1,485 option contracts a day - in the first 90 minutes over 16,000 have traded. The calls have traded 10:1 to puts. Further, the Net Deltas and Net Premium are substantially positive - indicating purchases of options and net long positions. The details are included below in the Company Tab snapshot (click the image to enlarge).



The Options Tab snapshot below (click to enlarge) demonstrates the most active trades. Jan 7.5, Jan 10, Feb 10 and Feb 12.5 calls. Note the Feb calls are opening. You can check the Time Sales Tab to see that these are purchases.



The Charts Tab snapshot below (click the image to enlarge) illustrates four things:
(1) The price increase of late.
(2) The implied vol increase of late - IV30™ (red line) vs HV30™ (blue line).
(3) The high level of option volume (height of volume bar) and
(4) The propensity of opening order customer call purchases (the green coloring).



Note this is a stock going up with vol also increasing. Volatility skew is the shape of the vol curve in a month going across strikes. Normally this is a downward smile (or smirk) - Lower strikes have higher vol than higher strikes. This is because the investing world (retail, mutual funds, pension funds) are generally long stock.

Implications:
(1) They buy puts for downside protection - raising the price (supply/demand) and therefore increasing the vol of lower strike price options.
(2) They sell upside calls for income on the long shares - lowering the price (supply/demand) and therefore decreasing vol of higher strike price options.

This relationship generally holds true. That's one reason why when stocks go down, vol goes up. i.e. stocks go down, people long stock buy puts for protection -> greater demand for options -> higher vol.

Similarly, that's why vol goes down when stocks move up. i.e. stock moves up -> longs stock sell OTM calls for income -> less demand for options -> lower vol.

But, for certain types of companies, the demand for upside calls is so great that the skew (vol) heads up for OTM calls as well - this is speculative call buying. Solar companies are a great example. Below you will see my make shift chart of SOLF skew versus IBM skew. The red circles draw your attention to the upside skew in SOLF unlike IBM.



The call buyers in SOLF are pushing up vol (and the skew). As market makers sell calls to customers, they keep raising the price to compensate for the piling on risk. The price goes up as they raise vol. Note that SOLF had an upgrade this morning to $13.

* UPDATE: 9-17-2010
With the new 3-D Skew Tab out in Livevol Pro, I have included a much better illustration of these same types of skews. The first chart is AAPL Skew, which is "normal" looking. The second is STEC on a day where call purchases have out paced puts on a 20:1 ratio pushing the upside skew.





* UPDATE: 11-22-2010 - YHOO Skew Goes Backwards on Takeover Rumors




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Taser (TASR) - UPDATE - Call Accumulator

The first TASR blog can be read here: FIRST TASR BLOG 12/28




A quick update. TASR was 4.32 on 12/28 - it has hit 5.80 today in the first half an hour of trading. That's 35% in 10 days with order flow to indicate. The bet was Feb 5 and Feb 7.5 calls - read the prior blog for details if interested: CLICK HERE FOR FIRST TASR BLOG 12/28.


Other stuff to watch today from pre-market:
FDO on earnings beat.
TPX continues upswing - straddle seller looks like a loser (for now)

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Ciena (CIEN) - Takeover Spec with Calls

CIEN is up 5% today on takeover speculation. The LIVEVOL™ Pro Summary is included below.



The Company Tab snapshot below (click to enlarge) shows that the company has traded over 61,000 (not a typo) options today in 4 hours versus 9,000 daily average.



The day's biggest trades snapshot and the Options Tab snapshot (click either one to enlarge) below illustrate the positions being taken.





Basically people are getting long OTM calls in Jan and Feb for size. 15,000+ Jan 12.5 calls have traded on 9300 OI (open interest) and 13,000 Feb 12 calls have traded on just 1408 OI. You can also see the Feb 11 and Feb 13 calls traded heavily versus smaller OI.

All this seems to be over some takeover speculation. I am usually a seller of upside calls on takeover speculation as people tend to pay up for what can turn out to be worthless options. Having said that, I don't usually see 600% of average daily volume trade on a little unfounded "spec." This is a tough one to call - no pun intended.

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Dynegy (DYN) - Call Buyer/ Put Spreader

DYN is a $1.5B provider of energy products and services in North America. The LIVEVOL™ Pro Summary is below.



The company averages 1,466 option contracts traded a day - in the first three hours over 10,200 have traded. The Company Tab snapshot below (click to enlarge) demonstrates that exactly 8000 puts have traded and the rest are calls.



The day's largest trades snapshot below (click to enlarge) illustrates that the 8000 puts traded in a 4000 Jan/Feb 2.5 Put Spreads (buying Feb and selling Jan for 0.10 debit). The other biggest trade is a purchase of the Feb 2.5 calls.



The Options Tab snapshot below (click to enlarge) demonstrates that the Feb options are opening (small open interest relative to trade size).



So what's the trade? The put spread could be a roll - Selling Jan puts he already owned and then buying the Feb puts to roll protection into the next month. If that's the case this trade is really just a 1:2 ratio straddle. i.e. Buy 1 call and 2 puts on the Feb 2.5 line. That's a bet the stock goes down, but with a smaller bet that it could rip through $2.50 on the upside. Either way, that trade loses most if the stock goes to $2.50 and sits.

If the put spread is not a roll - i.e. no previous option position existed and this is all opening, then the Jan options will be exercised (probably) and this guy will be long stock. He buys 4000 puts in Feb to hedge the long 400,000 stock and buys 2000 calls for an upside bet. That would be bullish.

Finally, this could be any combo of the above but selling stock with the calls (to make them puts) or buying stock with puts (to make them calls - this is unlikely since a spread traded).

All of these trades bet on a move in the stock.

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Tempur Pedic (TPX) - Straddle Seller

TPX is up 5% today to 25.62. The LIVEVOL™ Pro Summary is included below.



The company averages ~1000 option contracts traded a day. In the first hour over 8600 have traded. The Company Tab snapshot below (click to enlarge) illustrates that the call:put ratio is 1:1. Further, the Net Premium is -$390,000 - people are selling vol.



The day's biggest trades snapshot below (click to enlarge) and the Options Tab snapshot below (click to enlarge) demonstrate that the Feb 25 straddle is getting sold @ 3.90 (1.85 in the puts, 2.05 in the calls). Note also that the OI (open interest) is well below the trade size - these are opening orders (at least in part).





A look at the Charts Tab snapshot below (click to enlarge) illustrates the IV30™ (red line) vs the HV30™ (blue line) divergence on the bottom portion. You can also see that the stock has been on an upward trend. Finally, you can see how unusual this amount of option volume is.



At Feb expiration the straddle sale wins if the stock is above 25 - 3.90 = 21.10 or below 25 + 3.90 = 28.90. A straddle seller bets that the stock goes directly to the short strike at expo - in this case 25. If not held to expiration, the straddle seller bets on decreasing volatility - in this case, a bet that the implied vol (red line) comes back down to meet the historical vol (blue line).

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LSI Corp (LSI) - Multi Day Call Accumulator

LSI is a $3 billion technology company. The LIVEVOL™ Pro Summary is included below.



LSI averages 613 option contracts traded a day - in the first 2 hours of trading today over 3,300 have traded. Further, all but 10 contracts were calls for a 330:1 call:put ratio. The Company Tab snapshot is included below (click to enlarge).



The day's biggest trades snapshot below (click to enlarge) and the Options Tab snapshot below (click to enlarge) clearly illustrate that the action is in the Apr 7.5 Calls. Further, the green coloring on the biggest trades indicates these are trading on the offer (cust purchases).





From the Options Tab we can see the OI (open interest) in the Apr 7.5 calls is 2006. By digging deeper into the Level II pop up below (click image to enlarge), we can see the steady increase in opening postions in these calls. 12/31/09 shows a spike.



To see if these were purchases or sales I have included the Time & Sales snapshot below for that day (click it to enlarge).



These trades are all green - trading on the offer. It looks like there is a steady accumulation of OTM calls in LSI. On 12/31/09 they traded 0.15; today the bet doubles down paying 0.20.

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Novartis (NVS) - Alcon (ACL) - NVS Exercises a Call

NVS is trading down ~1.06 and ACL is down ~$4.34 right at the open. The LIVEVOL™ Pro Summaries are included below.





You can see a snapshot of the News Tab below (click the image to enlarge it):



NVS purchased 25% of ACL in April 2008 as well as call options from Nestle representing an additional 52% of ACL. The call option has a strike price of 180 (i.e. NVS is purchasing 52% of ACL for 180 per share).

So why is ACL trading $160? NVS is bidding $11.2 billion for the remaining 23% of ACL - that's $153 a share. So existing shareholders are facing a deep discount in stock from a buyout offer originating from an entity which is now 77% owner.

A quote from the CEO of NVS, Daniel Vasella, to analysts states that the discount for the remaining 23% reflects a premium that NVS is paying Nestle for control of the company. Marketwatch has a great article which I recommend for further color.

Here are the options implications. The ACL Company Summary is provided below (click the image to enlarge). You can see in the first 50 minutes of trading already 130% of average daily option volume has traded.



The day's biggest trades in ACL shows that the Feb 155 Calls are getting sold @ 7.40 and 7.00. This bet wins as long as ACL stays below $162.



You can see the Options Tab snapshots below for ACL (click either image to enlarge them). Note the prices on the Jan Calls and the Feb Puts.





The consensus (as of right now) seems to be that NVS can ram the deal through for the remaining 23% since they are already 77% owner. Trading opportunities exist if you believe that to be the case. Of course, trading opportunities exist of you don't believe that to be the case as well.

Swiss law prevails here because Alcon is a Swiss company. There may be some hope for the minority shareholders. Note that ACL is trading above the $153 price implied by NVS stock swap.

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