(XLB, XRT, XLY, KRE) - Buying Puts in Materials, Retail, Discretionary and Banks

The prior blog noted a massive call buyer in the Ultra Short Basic Materials (SMN) yesterday followed by a put purchase in the normal Materials SPDR today. That blog is viewable HERE.

The VIX jumps 6+ points in 3 days - so what's the breadth? Try this:

XLB - Materials Select SPDR - 90,000 OTM puts purchased
XRT - S&P Retail SPDR - 120,000 OTM puts purchased
XLY - Consumer Discretionary SPDR - 140,000 OTM puts purchased
KBW - Regional Banking ETF - 60,00 OTM puts purchased

These were all done in March options and were all 600% - 1800% of the total daily average option volume done in less than 2 hours. Keep in mind, these may be hedges for long market positions.

All four Company Tabs are included below with highlighted sections of importance. Click each one to enlarge.









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UltraShort Basic Materials (SMN) - Enormous Prediction

SMN closed 8.50 yesterday with IV30™ up 16%. The LIVEVOL™ Pro Summary is below. Note also at the botom of this blog the trades today in the long version of this index.



The company traded nearly 140,000 options yesterday on total daily average option volume of 4,144. That's nearly 3,500% of the average. Further, all but 88 contracts were calls for a 1578:1 call:put ratio. The Company Tab snapshot is below (click the image to enlarge).



Essentially the entire volume was a 131,028 lot purchase (on two prints) of Apr 12 calls for 0.375. The day's biggest trades and Option Tab snapshots are inlcuded below (click either image to enlarge).





The Apr 12 calls had OI of 77,843 - the OI today is over 209,000 - this indicates the prior trades (old OI) were also purchases. You could have verified this yesterday by looking at trade history on the Time & Sales Tab. The Level II pop up illustrated that there was an opening position (increasing OI position) on 11/27 in these calls. The Time & Sales Tab snap shot is included below - you can see these were purchases - so we knew yesterday that the additional purchases would push OI up - these are a double down bet (click the image to enlarge it - note I used a filter to find the larger trades).



Finally the Charts Tab snapshot below illustrates three things:
(1) That SMN has been much higher recently (over 17) - 52 wk. high is 57.
(2) The vol (both historical and implied jumped)
(3) The level of option volume is highly unusual.

Click the image to enlarge.


This is a ~$5,000,000 bet that Basic Materials get hammered (and thus the short shares increase).

Quick Update:
The XLB Materials Select SPDR (similar to the long version of the above) just traded 90,000+ puts purchased in March. The entire Company Tab is included below (click to enlarge). That's 90k puts in one hour on total daily average option volume of just 10k. This is the same side as the above trades (long delta in the short = short delta in the long).



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GOOG Earnings Skew

Here is a quick preview at the patent pending Skew chart coming to Livevol. The Skew provides a movie of the skew for the last 2 years and is fully interactive (spinnable). I have just taken a couple snapshots.

Note the upside skew in the red (front) and yellow (second) months. The calls are getting bid up even in this environment relative to the back months (green, blue and purple). Click the image to enlarge.

You can read more on options trades with GOOG into earnings here: GOOG Earnings Blog.



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Hot Topic (HOTT) - Call Buyer

HOTT is trading 5.91. The LIVEVOL™ Pro Summary is below.



I found it from the Scanner Tab. It's the number 1 results of the High Option Volume Scan (highest option volume relative to average). It has traded 2,430% of its daily option volume average. The Scanner Tab snapshot is included below.



The company has traded over 5,418 options today on total daily average option volume of 223. The Company Tab snapshot is below (click the image to enlarge).



Essentially the entire volume was a 2,500 May 5/7.5 call stupid purchase for 1.50 + 0.25 = 1.75. The day's biggest trades and Option Tab snapshots are inlcuded below (click either image to enlarge).





Note the open interest (OI) is much lower than the trade volume for both lines - these are opening trades.

Finally the Charts Tab illustrates the strong downward move over the lasy few months including a gap down after earnings. You can also see how large this option volume is relative to the average. Click the image below to enlarge.



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Bare Escentuals (BARE) - How Pros Trade a Takeover

BARE is trading 18.11. The LIVEVOL™ Pro Summary is below.



The company is in a deal to be taken over for $18.20 in cash. The Corporate Action Pop-up is included below.



The company has traded over 20,000 options today (not a typo) in the first 2 hours on total daily average option volume of 893. The Company Tab snapshot is below (click the image to enlarge).



Essentially the entire volume was a 20,000 lot purchase of Jun 17.5 calls. The options traded with 1.4 million shares (sold) @ 18.10. The day's biggest trades and Option Tab snapshots are inlcuded below (click either image to enlarge).





The calls traded with stock on an implied 70 delta (1.4million/2 million). That means the trade is really 70 puts for every 30 calls.

The puts have an implied price of:
Puts = calls - parity - cost of carry
= 0.85 - (18.10 -17.5) - .04
Puts = 0.21

That's 0.85 + 0.21 = 1.06 in 30 straddles and 40 more puts for 0.21. The payoff diagram for the trade at Jun expiration is included below.



Max loss is at 17.50 - but analytically, that outcome seems very unlikely. i.e. Either the deal closes for $18.20 or the stock falls hard on a bust. The stock was trading ~13.00 before the announcement.

Stock
$17.50: -$860,000 (max loss)
$13.00: +$5,400,000
$18.20: -440,000 (deal price)

So this is a $440,000 loser if the deal goes through with an upside of $5.4 million if the deal falls apart and the stock goes back to the original price. That's a 12.3 to 1 payoff. These are exactly the types of trades pros make on takeovers - "cheap bets" (in this case 0.21 options) to make huge money (in this case $5.4 million).

If you do an odds analysis (outcome tree) - you can create your own probabilities that the deal does/does not go through and try to position yourself accordingly. Remember a bet that is wrong 90% of the time is a good bet if it pays off more than 10:1. Alternatively, a bet that is right 90% of the time is a bad one if the payoff is worse than 1:10.

Play the odds, make appropriate bets with better payoffs than the odds, repeat --> Successful trader.

This is trade analysis, not trade advice. I have no idea what the odds are of this deal going through.

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Google (GOOG) - Options Trades into Earnings

GOOG is trading 579.14 as of the writing of this blog - could have moved since. The LIVEVOL™ Pro Summary is below.



All of the option prices are taken at exactly the same time as the above stock print for consistency. This is designed merely as an illustration of possible trades into earnings - as GOOG is one of the most popular and liquid names. None of this is advice - it is purely hypothetical - I have no idea were GOOG is gowing - wish I did.

The Options Tab snapshot is included below (click the image to enlarge) - I will refer to prices several times.



The Charts Tab snapshot with the Earnings & Dividends snapshot embedded inside it is also included below (click the image to enlarge).


Four out of an infinte number of ways to play GOOG earnings with options:

(1) Super Risky Short Straddle
Using the Feb 580 straddle as ATM and selling in between NBBO but a little worse than mid market: Sell 1 ATMStraddle
Bet: GOOG stays at 580 at expiration (Feb 19)

Collect: $22.90 (calls) + $23.10 (puts) = $46.00
Risk = UNLIMITED (yikes)
Max Gain: $4,600 (on one single straddle)
Click the PnL chart to enlarge it (below)


(2) Buy 1 570/580/590 Butterfly (calls)
Bet: GOOG stays at 580 at expiration (Feb 19)

Buy 1 570 call for: 28.20
Sell 2 580 calls @: 22.90
Buy 1 580 Call for: 18.40
Cost = 28.20 + 18.40 - 2*22.90 = $0.80
Max Gain: $920
Max Loss: $80
MG/ML = 11.5:1
Click the PnL chart to enlarge it (below)


(3) Buy 1 580/590/600 Butterfly (calls)
Bet: GOOG goes up to 590 at expiration (Feb 19)

Buy 1 580 call for: 23.10
Sell 2 590 calls @: 18.30
Buy 1 600 Call for: 14.40
Cost = 23.10 + 14.40 - 2*14.40 = $0.90
Max Gain: $910
Max Loss: $90
MG/ML = 10.11:1
Click the PnL chart to enlarge it (below)


(4) Buy 1 560/570/580 Butterfly (calls)
Bet: GOOG goes down to 570 at expiration (Feb 19)

Buy 1 560 call for: 34.00*
Sell 2 570 calls @: 28.10
Buy 1 580 Call for: 23.10
Cost = 34.00 + 23.10 + - 2*14.40 = $0.90
Max Gain: $910
Max Loss: $90
MG/ML = 10.11:1
Click the PnL chart to enlarge it (below)


* Since the call market is too wide to use mid market -->
34.00 is derived from put-call parity. If the puts are worth 14.60:
Calls = 14.60 + (579.14 - 560) + cost of carry
= 14.60 + 19.14 + ~0.26 = $34.00


Of course, there are infinitely many more outcomes. These are infact limited to small stock moves and are fairly rigid. The payoff for the safer butterfly (compared to the naked straddle) is > 10:1 which seems tempting. But then again, what are the odds GOOG hits those values at stays there until 2/19? Is it less than ~10%?

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Jaguar Mining (JAG) - Straddle Seller

JAG is trading 11.52. The LIVEVOL™ Pro Summary is below. Note the shorter term HV measures.



The company has traded over 4,600 options today in the first 3 hours on total daily average option volume of 3605. Further, the call:put ratio is exactly 1:1. The Company Tab snapshot is below (click the image to enlarge).




The biggest trade(s) of the day are in Sep. The Sep 12.5 straddle was sold 1000 times @ 1.60 + 2.24 = 3.84. Another 1000 Sep 12.5 puts were sold 1000 times (possibly with stock to turn them into 500 straddles - but I'm not sure). The day's biggest trades and Options Tab snapshots are included below (click either image to enlarge).





Note zero open interest in the Sep 12.5 line - these are entirely opening orders. This is a vol bet - namely that the ~50 vol that was sold is better than the future underlying volatility. The Charts Tab snapshot below (click to enlarge) illustrates some interesting results.



Note the IV30™ (red line) is well above the HV30™ (light blue line) and both are well below 50 (the vol sale). The HV60™ (dark blue line) is 50 (on the nose). This is a bet that the underlying moves more like HV10™/HV20™/HV30™ and therefore makes a 50 vol sale a winner. If this was done without stock, it is slightly bullish - as the short straddle wins max when stock goes to the strike exactly.

If this is in fact a ratio straddle, then it is slightly more bullish (sold more puts than calls).

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Rubbermaid (NWL) - Reverse Skew on Takeover Rumor

NWL is trading 15.35. Note the IV30™ 16% increase. The LIVEVOL™ Pro Summary is below.



I found NWL from the "High Option Volume" scan (Scanner Tab). The company has traded over 14,500 options today in the first hour on total daily average option volume of 1,594. Further, 14,200 have been calls for a 42:1 call:put ratio. The Company Tab snapshot is below (click the image to enlarge).



The calls that are trading are: Mar 17.5, Feb 15, Feb 17.5, Jun 17.5 and Mar 15 in descending volume order. The Mar 17.5 have traded 9000+ times on less than 1000 OI (open interest) - those are opening orders. Almost all of the call volume has been purchases. The day's biggest trades and Options Tab snapshots are included below (click either image to enlarge).





Note the IV's in Feb and March.
Feb 15 (atm): 35
Feb 17.5: 40

Mar 15 (atm): 37.
Mar 17.5: 39.

This is a classic reverse skew when one line in particular is bid up. For a thorough discussion of reverse skew you can look to this prior blog: SOLF Reverse Skew Blog.

The simplistic March skew for just three strikes is included below. Note now that upside and downside are creating a smile (rather than a smirk).



The NWL Charts Tab snapshot is included below for reference.


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AAPL/ADBE Takeover Rumors

I couldn't resist... Anyway, it's Friday and it's slow on the floor...

The same old rumor about AAPL taking over ADBE popped up again today. Out of sheer boredom I looked for some unusual order flow... And what do you know, I found some.

ADBE is trading 35.88, AAPL is trading 207.53. The LIVEVOL™ Pro Summaries are below.





The day's largest trades from 1/7/2010 for ADBE are presented below. Simply put, someone sold a risk reversal 6500x and received $0.03. i.e Sold July 32 puts @ 1.43 and used that to fund a purchases of Jul 42 calls for 1.40. This is obvioulsy very bullish (unless it traded with stock). Click the image below to enlarge.



I'm not really familair with ADBE relative to its option trades. I took a look at the Options Tab for several months to see if 6500 open interest (OI) is common. Lo and behold - it isn't. In fact, there is not a single line with OI greater than 2,574 in Feb, Apr, July, Jan 11, Jan 12 (other than the strikes in question). The Options Tab snapshot for those months is inlcuded below (click the image to enlarge).



Just for fun - how does this trade look if ADBE is taken over for $50?
Gain = 6500*100*{$1.43 + ($8.00 - $1.40)}
= $5,219,500

Hmmm....

This isn't trade advice just analysis. Read legal below.

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Total Systems (TSS) - Earnings Vol and Puts

TSS is a $3 billion global commerce solutions company. Note the earnings date is 1/20/2010 AMC. The LIVEVOL™ Pro Summary is below.



The company has traded over 2,300 puts today in the first three hours on total daily average option volume of just 211. The Company Tab snapshot is below (click the image to enlarge).



The trading action is in the Feb 15 puts - over 2,100 have traded; purchases for 0.15 and 0.20. Note the OI (open interest) is just 61 - these are opening put purchases less than a week before earnings. The day's biggest trades and Options Tab snapshots are included below (click either image to enlarge).





From the Summary above you can see that the historical vol has beeen around 13 (HV10™, HV20™ and HV30™) while the IV30™ is over 30. The day's biggest trades snapshot demonstrates that these puts were trading 36-40 vol. The Charts Tab snapshot is included below for reference - notice the divergence between HV10™ (white line), HV20™ (blue line) and the IV30™ (red line).



The Charts Tab snapshot also illustrates the gap down in stock price after last earnings release. The Earnings & Dividends tab illustrates that on the 4/28 and 7/28 earnings cycles, the ATM straddles actually moved up - i.e. underlying moved so much a back spread was a winner. The 1/27 and 10/27 cycles were the opposite - front spreading was a winner.

Note that the Feb ATM straddle mid market value is 1.20 + 0.25 = 1.45. vs stock at 16.59. So parity is 17.5 - 16.59 = 0.91. So the straddle is trading 1.45 - 0.91 = 0.54 over. The 15 strike is 1.59 away and 1.74 away from breakeven on a 0.15 purchase.

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