InvenSense (INVN): Traders Position for Volatility, Skew Signalling M&A?

 InvenSense (INVN) finished the day with a strong move the last two hours as implied volatility soared, 30 day IV jumped 21.5% on the day to 63.4%, approaching levels generally seen into earnings.  INVN finished the day trading 42,396 calls, 8X daily average, though most of the action broken into smaller trades.  The April calls saw fresh opening action from the $19 deep ITM strike all the way to the $26 OTM strike where 4,929 contracts traded, far OTM and were bid $0.90 by day end.  INVN’s June calls were hot as well with more than 3,500 $28 and $30 calls each opened.  This is very abnormal activity, and comes after recent rumors that Skyworks (SWKS) may be interested in acquiring INVN.  

INVN’s IV Skew is also indicating that something could be stirring here, inverted for March, April, and June, a very bullish signal, though in the case of INVN it does have 36% of its float short, 26.5 days to cover, and head risen 30% since last October, so the demand for OTM calls may be protective for shorts, but the degree of OTM for these strikes makes it look less likely to be a hedge, and more likely to be speculation. 

On the chart INVN shares are also clearing all time highs set back in 2012, and out of this $16/$22 range that targets a move to $28.


The $1.94B maker of motion technology chips for tablets and Smartphone’s trades 27.7X earnings, 7.79X sales, and 6.3X book, but a premium valuation deserved due to it being in a strong growth market, 2013 EPS growth of 59.5%, 2014 EPS growth set at 32.5%, and projecting 20%+ EPS growth forward.  Topeka Capital was out this morning raising its target to $25 from $21.   INVN does make a lot of sense as a M&A target as we have already seen consolidation in Semiconductors this year, and the larger names have a lot of cash and are looking to add growth and enter the markets that INVN is excelling in. 

One way to play the skew for a possible takeover is via the June $23/$30 call spreads for $1.60, offering more than a 3X reward for risk ratio.


Strategist Sees Clovis Oncology (CLVS) Range-Bound, Albeit a Large One

Clovis Oncology (CLVS) traded 4X daily options on the day mainly due to one large  trade, a trader at the ISE sold 1,000 July $105/$60 strangles at $12.20 to open.  This position is looking for CLVS shares to be in the $47.80 to $117.20 range come July expiration.


The $2.5B Biotech is nowhere near profitable, but shares have climbed 282% the past year on a promising pipeline.  On 2-8 Leerink Swann boosted its target on CLVS to $110.  CLVS shares moved higher last week after updating its CO-1686 program for non-small cell lung cancer, increasing the size of expansion cohorts to build a larger clinical data set.  In January a Citi analyst called CLVS the next big Biotech and highlighted a management reckoned for selling to larger companies, so a potential M&A target as well. 


CLVS saw institutional ownership climb 8.5% last quarter, the 53rd largest holding for SAC Capital who is the 5th largest holder of CLVS stock.  The success of CLVS largely depends on CO-1686 in NSCLC but it also has Rucaparib for Ovarian cancer and Lucitanib for breast cancer as other pipeline drugs, and makes it even more attractive as an acquisition candidate. 


CLVS also has a beautiful chart with shares seeing accumulation and heading back near 2013 highs, looking to take out the $85 level to leave a 35 point range, and a flag that measures to a $155 target for shares.  


A trade to consider is buying a 1/2 position in CLVS at $83.50 and selling this strangle for $12.20, resulting in a $71.30 net entry willing to be called away at $105 ( +47.25%), or adding to your stock position at $60 is shares were to violate the $60 level.

Euronet Worldwide (EEFT), A Fallen Star Worth Catching

 A risk-reversal is a professional trade used to maximize leverage and generally shows a lot of confidence in a view, the trader willing to buy the stock in size ( puts sold), but also wanting upside exposure ( calls bought) and uses proceeds to purchase upside calls.  Now, when I see these trades done for a net credit I see them as less confident as the trade can make money as long a the stock trades above the sold put strike on expiration, and just shows a willingness to buy the stock.  However, when these trades are done at a net debit, the trader is not only willing to buy the stock at the strike where the puts were sold, but is outlaying money to take this stance, an expectation shares will not only be above the sold put strike, but also above the purchase calls strike.  

Seeing these trades in stocks that are rarely active with options is even better for me, it turns my attention to a name that a lot of others are not following, but someone that is surely confident and did the research/work in the name, is putting his/her money on the line.

This was seen today in Euronet Worldwide (EEFT), so let’s take a look:

Euronet Worldwide (EEFT) traded 100X daily options as a spread at the AMEX bought 1,000 August $40/$50 call spreads at $2.64 and sold 1,000 August $35 puts to open at $2.05, a large bullish covered risk reversal in a name that barely trades options,

Shares recently dove on earnings and are attempting to hold above the 38.2% Fibonacci at $37, a stock that ran to $50 from $17.50 in nearly a straight line, but also re-testing a 2006 top at this level, so potential to base. 



EEFT reported $0.63 vs. $0.57 and $375.4M vs. $384.9M, fairly solid, so it is surprising to see shares so week.  The $2.03B provider of payment and transaction processing solutions (a hot space for both M&A and IPOs to come), now trades 14.65X earnings, 1.44X sales, and 3.19X book with 13-15% forward growth, attractive on valuation.

Back in November Piper met with management and came away positive, a $56 target on shares noting strong trends with ATM growth, DCC for ATMs and POS, Poland, Google Play/ iTunes, and additional banks following Swiss Post.

EEFT is a top 10 holding at a few firms, Granahan Investments, Van Berkom, Awad Asset Mgmt., Arbor Capital, and Hood River Capital.


It is definitely a name worth a look long, easier with the stock due to wide spreads in the options.


Affymetrix (AFFX) is another name that traded May $10/$7.50 bull risk reversals 3,000X today, very unusual, but of less interest due to its fundamentals and the spreads were done at a net credit.

Time Warner (TWX) Upside Calls Attractive with Further Re-Org. Potential

 Time Warner (TWX) shares have been fairly quiet with many of the top media names like Disney (DIS) and CBS Corp (CBS) rallying sharply to new highs.  It’s a name worth a look at this level looking forward the next 6 months, and will break it down below on each degree of analysis.


Time Warner (TWX) has a $58.63B market cap and trades 14.36X earnings, 1.97X sales, 1.96X book and 28.77X FCF with a 1.77% dividend yield, and 15% forward EPS growth projected.  TWX has a record of consistency posting 5 straight years of double digit EPS growth, and in 2013 FCF rose 20%.  TWX also recently raised its dividend 10% and announced a $5B buyback. 

Now, the value I see in TWX is that when looking at its report it clearly is segmented into 3 companies, Turner Broadcasting (TV), Home Box Office (Premium TV), and Warner Brothers (Movies).  Time Warner has already decided to spin-off it’s publishing segment, Time Inc., and I think it could easily decide to spin-off one of its segments, most likely Warner Brothers to focus more on TV (recent new investment into a sports network), and after recent Box Office success (Lego Movie, The Hobbit, Gravity). 

Analysts target include FBR Capital at $85, Bernstein at $73, and Wells Fargo at $75.

Institutional Ownership:

TWX is a #9 holding at Dodge & Cox, #6 holding at Viking Global, and #9 holding at Longview Partners, notable gurus.


TWX recently put in a strong reversal hammer bottom on a re-test of its former 2013 top breakout, and also held near support that was created in August 2013, still in a strong uptrend.  TWX shares are currently consolidating below its 20 week EMA, and a move above $65.50 sets up for a measured move out of this small cup and handle forming to $70 for the chance to make a run through its highs.


Options Activity:

TWX has seen some notable upside positioning in calls that remain in OI:

·         5,000 July $72.50 calls bought to open $0.78 to $0.80 on 2-6

·         March $67.50 Calls Bought to Open 15,000X on 1-27 at $0.52

·         7,000 April $70 calls in OI from a series of buys


TWX options are fairly cheap with IV30 at 19.2%, the 29th percentile for the past year.  The July $67.5/$75 call spread at $1.50 is a nice reward/risk strategy.

Categorizing the Types of Options Flow Analysis and the Research Process

 This is a follow up to "Methods to My Madness – Trading Options Flow" from 8-29-2012 where I explained my style of trading. (Link to 8-29 Article) (Sorry the format on the blog got messed up).

The strategy of trading options flow has become a lot more popular since I posted that article, but now to a point where there is a lot of sloppy work, and most of it is focused on the what instead of the why. This has caused a push for quantity over quality, hundreds of "unusual" trades posted daily across Twitter, and then you only hear about the 20% that end up working out, and hear about them over and over again, while the 80% fails are never discussed (the ole’ throw a bunch of crap against the wall and hope something sticks approach). The only way to improve on the success rate is to focus more on the why than the what, an ability to be selective by utilizing a strategic research approach to each case to analyze the trades from every angle.

I could, and hopefully someday will, write a book on this art of trading, but I do not want to give away all my secrets, though hope I can shed some light to put people on the right path as the popularity of this style rises.

The first step in the process in clearly the "discovery" phase, finding unusual and/or large options trades that provide a signal. There is value in each, both unusual trades and also in large trades. I will discuss each briefly.

Discovery of Unusual Options Trades

To simplify what qualifies as unusual I would look for at least 1,500 contracts to trade in a stock that on average trades less than 1,000 contracts a day, either on the call or put side, but generally more interest in the call activity due to the natural market long bias where puts are more often hedges on long stock positions than calls are on short stock positions.

In searching for unusual trades there is generally an event catalyst that is the rationale behind the trade, or in certain circumstances information is known by one individual or a select few individuals that can move the stock. These traders are not taking 1,000 lot positions because for one they typically do not have the account power to make that kind of sized trade, and second to stay under the radar in case of a SEC investigation.

I’ve utilized this method to be long dozens of names that were bought out within weeks of the unusual trades, a recent one last week was Accelerys (ACCL). I focus on names seeing action 1-3 months forward and usually under 2,500 contracts, often accumulated over 3 or more days, and aggressive (sloppy / not professional) orders paying offers on wide bid-ask spreads.

These type of trades are often in small caps where information dissemination is not as instant, and also there is more value to be found in names that are not covered by every sell-side Analyst on Wall Street, and traded by every day-trader on the internet. A lot of Biotech stocks often pop up on these scans and that is for a couple of reasons, first there are always events taking place in these names, second it is a naturally speculative trading sector for M&A and the big score type moves, and third there are a lot of smart people that specifically focus on this industry, do the proper research, and are willing to put money behind his/her view on where the stock is headed.

There is definitely value in this style of following options flow, but it is also a style that comes with a much lower hit rate, and takes years of experience to be able to spot the ones worth pursuing.

The type of trade is also notable, one thing I have discussed many times is seeing large opening put sales in < $10 Biotechs, and this I have seen 85%+ success rates buying these stocks when the trades hit, and often for 50%+ moves in the stocks within weeks. Risk-Reversals are always a confident trade, and these are made by professionals, selling puts to finance call purchases, and in 2014 seeing a lot of cross-month risk-reversals in smaller names, and these have paid off big in January, a few recently were ZLTQ, BABY, FLDM, and ARAY.

Further analysis is always required, looking at trends in the volatility, skew, and watching for multiple days of activity.

Discovery of Large (Institutional) Options Trades

I qualify a 500 contract lot as large, but typically want to focus in on at least 2,500 block contracts, and also take into account the contract price, so the net premium and net delta of the trade, the larger the better. These are the type of trades that the smart money are making, hedge funds and other big-time traders. I have covered this topic before, so I do not need to go in depth describing the reason to follow these trades.

These trades are often said to be "cheaters" by the critics when they work, though in reality man of these trades that work are a self-fulfilling fruition, meaning that activists position in stocks via large option trades, and then make news when they push for board seats, spin-offs, asset sales, etc. that causes the stock to jump, and thus the option positions to gain. The traders did not know something would happen, they actually are making the moves happen.

The best trades to follow are the event-driven trades, that is where the money is made for the real big moves. Smart Money is not looking at charts for breakouts, bottoms, tops, etc., these are fundamental based trades that see value in a stock that others may not yet see, and position to be able to push for this value to be realized.

Phase 2: Researching the Why

After discovering the unusual/large trades as a signal, the most important stage is getting inside the mind of this trader to determine why he/she is positioning, in what direction, and for what time-frame, and you can draw conclusions to either emulate the given trade, or pursue your own strategy. I will not cover everything in this piece, but will give a good view of my process.

The first analysis is fundamental, the most important reason for a stock’s movement over time. I look at the main metrics like P/E, P/S, P/B, P/FCF and EV/EBITDA while taking into account what phase of growth the company is in to determine the appropriate valuation technique, also realizing that traditional metrics often do not apply, and industry-specific and even company-specific metrics are often more important. I also look at 5 year historical ranges and averages for the metrics noted above, while for momentum/growth stocks look at not only its last 6 quarters of earnings vs. estimates, but also the stocks reaction to the numbers to gauge sentiment. A deeper dive into fundamentals can often reveal the catalyst that can move the stock, a very important factor. You also want to be paying attention to relative strength in sectors, and investing themes that are hot and can be applied to names popping up on scans.

The second phase of the analysis is technical. Although technical analysis is not a useful tool in determining what stock to buy/sell, it is very useful in determining WHERE to buy/sell. I keep things rather simply, using a lot of trend lines and flag/triangle patterns with measured moves. I also use moving averages and Fibonacci retracements, but do not bother with all these other crazy techniques with Waves, Sharks, ABCD, and whatever else, less is more. RSI, MACD, and On Balance Volume are my main secondary indicators, mostly useful for divergences and/or oversold/overbought indications. Once determining key levels for a stock you can look to set alerts, and position in the names when you want, not always right away once the unusual trade is spotted, it often pays to be patient. I will say that these large and unusual trades are often right and make large profits, but the timing on entry/exit of these large trades if rarely ideal, perfection is not attainable in trading.

The third phase I look at is Analyst upgrades, downgrades, commentary, and price target changes. Although this should not determine a buy/sell, it can be useful in gauging where Analysts have targets for stocks, and the commentary often has a lot of value in potential catalysts for the stocks, or at least important material information that will impact the stock in the near future. I’m lucky to have access to all the best research on the Street, and this goes a long way.

The fourth factor I look at is trends in short interest. If unusual/large call buying alerts me to research a stock, but then I see over the last 3 months short interest has double, I am wary to follow the action as being bullish, a case where call buying can be hedging for event-risk. A 5,000 contract purchase of a 50 delta contract is equivalent to just 250,000 shares of stock, so if short interest in 3 months has risen by multi-million shares, it gives that call purchase a lot less meaning.

The last factor, and one I have just started to incorporate more for subscribers this year is diving deep into ownership trends. I look at Institutional ownership changes for the most recent quarter of filings, and also look at the largest holders of the stock, and the ranking for that fund’s holdings in terms of size. This allows me to often spot a notable guru that is involved in the name, or even better a known activist (I have a list of 35-50 for subscribers). This is just another factor that can increase/decrease my interest in a stock, and all about increasing the confidence in being able to determine just what the goal is for this option trade.

I realize this may seem to be an arduous process, but the truth is that it is very necessary if you want to have a high hit rate. There are no short-cuts, do the work, develop your own process, and take the trades that align on all scales of analysis.

Discovering and Analyzing options flow is very lucrative, and a must-have tool for any serious trader to supplement his/her main style of trading. It also is great for idea generation, as it often starts me on my research path to discover companies I know little about that turn out to be major success stories, a fun aspect of this method, and also rewarding, both monetarily and as confirmation of a well thought out process being turned into substance.

Thanks for reading, and hopefully this will help you better sort through information overload on Twitter.


Trading Inverted Implied Volatility Skew with Vertical Call Spreads

A discussion today on Twitter led me to thinking this could be a helpful topic to discuss…

It is Friday, so will keep this short, and hopefully sweet.

I often will note "inverted" or "bullish" skew when discussing a stock’s options IV (Implied Volatility) profile. I do not want to get into a deep explanation of the concept as it is readily available with a simple Google search. It is one of the more important concepts in options trading, and suggest diving into the topic deeper.

Basically a normal IV Skew reflects higher IV in the OTM puts compared to the ITM Calls/Puts and OTM Calls, sloping down from left to right as strike prices increase. The reason for this is that the need for protection via puts drives up demand of OTM puts with the natural market long bias in stocks, and there are some other explanations as well, but that is the simple conceptual view and without being too mathematical and the takeaways are more important.

There are occasions, fairly rare, where the IV Skew inverts, also called a bullish IV skew and often referred to as an IV "smile". What this is showing is an upside bias as the demand for OTM calls is so strong that the IV profile "flips" and the demand for OTM puts is weak, so longs see limited need for protection, a view of limited downside with a strong bias towards an upside stock move.

A recent case of this for August was in Anadarko Petroleum (APC) where the IV Skew inverted with strong demand for the OTM calls, seen ahead of its 7-30 earnings date, though the Institutional sized traders in the calls looked to be expecting an additional catalyst such as the litigation with Tronox (TROX) or drilling results. You can see the August OI as of today in the $92.50 calls was 22,991 and 42,130 in the $95 calls, each of which expired worthless, which brings me to the important takeaway.

Conceptually the activity is implying a view shares will close that expiration above the given strikes being bought, and this IV driven higher in the contracts. However, my takeaway with this is that if the expectations are for that kind of move the higher probability trade is utilizing vertical call spreads that will not offer the same kind of returns as striking gold in the OTM calls, but is a more intelligent way to trade.

In this case the trade was to be buying the "cheap" (in relative IV terms) $87.50 calls, and sell the "rich" (again, in IV terms) $92.50 calls. The APC August $87.50/$92.50 call spread was available for less than $2 into earnings and closed today just above $4, a 100% gain, and clearly the better trade than being long the OTM calls that expired worthless, or even the stock itself.

This is my preferred method, while another strategy would be to put on calendar call spreads, selling the front-month OTM calls that are "bid-up" (meaning bullish IV skew profile), and buying the next month ITM or OTM calls that are cheaper in IV terms, a calendar or diagonal spread. The issue with this strategy arises if the positive catalyst comes in the front-month before expiration and blows through the upper boundary of the profit zone.

We recently applied the vertical call spread strategy in Family Dollar (FDO) that was exhibiting a bullish IV Skew, well ahead of the recent takeover chatter, and put on August $70/$75 call spreads for $0.60, and were pricing above $3 on the recent spike, a quintuple.

Now, if you made it this far I hope you enjoyed the article, and as a reward a case of IV Skew inverted for September that looks unusual is in Qlik Tech (QLIK), where a strategy such as the September $33/$37 call spread at $1 debit makes a lot of sense for a 3:1 reward/risk, and a name that has been trading very well and can be a candidate for M&A.



Fortinet and Source Fire Seen as Takeover Targets, Pro-Option Strategies

On Monday this week I highlighted to subscriber two large trades in similar Tech stocks, Source Fire (FIRE) and Fortinet (FTNT), both of which are in the hot network security industry.  Both of these companies are clearly takeover targets, growth names in a secular growth trend with no debt, and large cap Tech companies like Cisco (CSCO) wanting to gain exposure into this industry, and have plenty of free cash to make deals.These were large professional trades that Institutions use to be on takeover targets the way the trades were structured, and both are up nicely already from Monday.  The spreads were complex, but is actually the most optimal way to position for a takeover, buying high Delta calls and selling LEAP Strangles.The trades were as follows:Fortinet (FTNT) trade bought 2,500 June $25 calls at $2.25 and sold 2,500 January 2014 $35/$20 strangles at $2.85, a net credit of $0.60, or $150,000, done at the PHLX.Source Fire (FIRE) trade bought 1,250 June $50 calls at $4.60 and sold 1,250 January 2014 $70/$40 strangles at $6.60, net $2 credit, or $250,000, also traded at the PHLX.These are professional trades that are finding opportunities to buy short-dated calls and sell longer-dated options where M&A is not accurately being priced into the options.  With short-dated volatilities cheap on both FTNT and FIRE after the post-earnings IV collapse the options give an opportunity to gain exposure with limited risk, and also taking advantage of the options term-structure.  Selling the longer dated options is also advantageous as a deal announcement will drive down volatility once announced, and with a limited downside view and also a price-target for upside on a deal in mind, the trade can be structured like those highlighted above.Scenario Analysis:Fortinet (FTNT) in the optimal case is acquired at $35/share, and the June calls are then worth $10 and upon the deal closing the January $35/$20 strangle expires worthless and the trader banks $2.5M (plus original premium).  The worst case is that the trader has a longer term view willing to be put 250,000 shares of FTNT at $20/share.Source Fire (FIRE) in the optimal case is acquired at $70/share, and the June calls are then worth $20 and upon the deal closing the January $70/$40 strangle expires worthless and the trader banks $2.5M (plus original premium).  The worst case is that the trader has a longer term view willing to be put 125,000 shares of FIRE at $40/share, near the recent lows before a blowout earnings report.

Record Call Buying in CBS Corp. Precedes Strategic Initiative News

CBS Corp (CBS) shares are surging 8% tonight after announcing plans to convert its America’s Outdoor Business into a REIT and divest its European and Asian Outdoors Business.The news comes to no surprise to OptionsHawk members because I have been highlighting the strong Institutional call buying in CBS every day since 1-9-13 and will breakdown the trades.  It’s not only important to find this options action, but to also put in the proper research to figure out WHY the Institutions are positioning in this manner.  My research told me that CBS will likely explore strategic alternatives for its Outdoors business to enhance shareholder value, so not only were we positioned right, we expected this exact news.It should prove to be a great day tomorrow as we are long the February $39 calls, and I also own stock.The highlights of the options action was as follows:1/9/13: Traders Buy 6,500 February $39 Calls at $0.90 to Open (13,000 Traded but OI +6,500)1/10/13: Traders Buy 5,000 February $40 Calls at $0.70; 5,000 January $41 Calls at $0.10; Traders Buy 6,500 March $40 Calls at $1.101/14/13: Trader Buys 35,00 February $40 Calls at $0.851/15/13: Traders Buy 10,000 February $40 Calls at $0.651/16/13: Traders Buy 5,000 February $40 Calls, 3,800 March $40 Calls and 10,000 March $42 CallsThe way traders are positioned in OTM calls tells me that CBS likely runs higher the next few weeks, and will depend if I see profit taking in these calls, or traders holding for more gains.And before we see people screaming "Insider Trading", it was not, it was just knowledgeable Institutions seeing an opportunity knowing that this option for CBS has been on the table, and that’s why I follow the large $, because more often than not it is right and large profits follow!

2013: The Year of Facebook Calls, Options Analysis and Why

Facebook (FB) quickly became one of the most actively traded options since its IPO and averages 133,000 calls and 107,000 puts per day.  Open Interest in calls is above 1.2 million and just over 1 million puts in open interest.The options activity in the first 7 trading days of 2013 has taken it to a new level though:1/3/13: 205,000 Calls and 109,000 Puts1/4/13: 215,000 Calls and 93,350 Puts1/7/13: 259,700 Calls and 159,650 Puts1/9/13: 385,000 Calls and 138,000 Puts1/10/13: 360,00 Calls and 196,400 PutsAlthough weekly options have accounted for a lot  of the action, sizable buyers are saying that Facebook is more than a short-term rally and positioning in February, March and June calls.  In the Options Hawk Trading Hub Live Chat I first was interested on 1/4/13 when I saw 4,000 February $30 calls bought to open in the first 25 minutes of trading, and we bought those at $1.33.Later that day bullish 3 way spreads traded 8,000 contracts, selling the February $26 puts and buying the $30/$34 call spreads, net $0.02 debit for the spread.  ON 1/9/13 traders bought 15,000 June $30 calls to open at $3.75 offers, 7,000 June $31 calls and even 10,000 of the June $37 far OTM calls.  On 1/10/13 the March $30 calls were hot as 14,000 traded against OI of 23,284.The action has been intense every day with a major bullish bias, and not small-timers, Institutions positioning.  While market volatility has fallen off sharply, the IV30 in Facebook has jumped 18.7% since the start of 2013, and IV30 stands at 56.5%.Facebook earnings are scheduled for 1/30/13 and the weekly options expiring 2/1/13, the week it reports, have an IV of 66.25% which compares to regular February expiration at 56.5% and March at 50.57%.The bullishness is also clear in the Facebook options IV Skew.  The January 19th expiring options has a completely inverted skew with OTM calls priced well above the puts, showing the demand for upside calls versus. downside puts.  A similar skew profile exists for Jan. 25th expiration, but a bit more normalized for February 1st, earnings week, but still bullish.So, what is behind this new found bullishness for an IPO that was a complete failure in 2012?  Well, there are many potential explanations:1) Technical – Facebook shares built a solid base in the $17.50/$24 range, and after an earnings gap-up last quarter shares fell back and filled the gap on light volume, and on 11/14/12 put in a high volume strong candle that started this rally after ADX showed a bullish crossover buy signal on 11/13/12.  Shares moved through $24 on 11/21 which put a measured move target at $30.50.  Shares proceeded to rally up to its 38.2% Fibonacci at $28.05 and stalled with a multi-week consolidation, healthy in the new uptrend, and then broke out past resistance on 1/4/13 (same day the options turned very bullish).  Looking ahead shares closed today at $31.30, which happens to be the 50% Fibonacci Retracement, and above leaves room to the 61.8% Retracement at $34.50, although $33 likely to provide some resistance from a top that formed last Summer.  FB shares have a lot of momentum and likely to complete the $28/$17.50 range break measured move, a $39.50 target by May.2 – Fundamentals / Risk-On Market – Facebook clearly has benefited from a market that has rallied, but it also has been resilient on days the market pulls back, and seen plenty of Institutional support in the stock as well.  With much of the uncertainty removed from markets (Europe Debt Crisis, Elections, China Hard-Landing, Fiscal Cliff) investors move to risk-on and growth stocks are seen as more alluring for potential higher % returns.  FB has a $67.8B market cap currently and trades 48.15X FY13 earnings estimates, 4.79X book value and 6.5X cash value (large cash holding is impressive and leaves opportunity for investment in growth organically and via acquisitions, and also buybacks).  With the market expecting to show limited growth in 2013 earnings Facebook is growing EPS at a 25% clip.  Facebook is making a major push to monetize mobile and it is a top play for online ad revenue growth.  FB also has plenty of opportunities to monetize with 1 billion users spending 6 hours/month on the site, and has been launching some new initiatives like Gifts (eCommerce), and has revenue opportunities to monetize Instagram.  Recent data shows that mobile usage is growing rapidly and now accounting for more than 50% of total minutes spent on FB.3 – Short Squeeze – Facebook (FB) short interest jumped to 95.3M shares as of 11/15, more than a 50% jump from 61M shares on 8/1, and the latest reading on 12/15 showed it has fallen back to 55M shares.4 – Expectations into "Mystery Event" – Facebook will be hosting an Event on 1/15/13 and has not released many details, but some rumors expect Facebook to launch its own mobile phone (possibly a bad move).  Facebook may also launch a Search Engine, announce an acquisition (WhatsApp).  If the event is simply a Facebook website makeover, it could be a let-down.The action has been great and weekly options provide a great day-trading/scalping vehicle, but the information available suggests this move is the start of something much larger.Hopefully this write-up was helpful or provided some fresh perspectives.

Trading Stocks Post-Earnings Based on Options Activity

As Hurricane Sandy bears down on New England I figure I had some time to put together a quick educational post with two examples from last week, focusing on trading stocks/options following an earnings reaction.I often utilize my analysis of options activity to determine the magnitude and direction a stock will trade after earnings, and position for this with various option strategies, but it also pays to know where the big money is positioned for post-earnings trading.It pays to be prepared knowing how the options market is positioned, key technical levels, and the valuation that would make a stock a buy on an over-reaction gap-down.Western Digital (WDC) reported earnings last week and into the report I was tracking large November bullish risk reversals.  Traders were actively selling to open puts at the $32 strike in November and also at the $35 strike in the week leading up to earnings and also buying calls at the $39 and $41 strike, but the key takeaway was that large traders were willing buyers of the stock with the put sales.  I figured it was best to wait out the earnings because WDC headline results would likely disappoint due to its exposure to the dying PC market, but looking at valuation shares were trading less than 5X forward earnings, 0.7 PEG, and 2.5X cash value, so I figured downside was limited.  I also looked at the 5 year chart and a trend line off the 2009 lows and 2011 lows came into play near $32.50.  After reporting results WDC shares gapped down to lows at $32.25 from $35 and utilizing the info that I had prepared (above) I picked up the stock at $32.45 as a day-trade and was able to sell near $34.75 later that day, a great intraday scalp.Chicago Bridge and Iron (CBI) is another example, a stock that reported earnings on 10/23, and one where I had seen 6,000 January 2013 $36 calls bought to open on 10-19, so it had a bullish bias, but as an Industrial I once again wanted to wait out the numbers.  CBI was also a case where large trades hit right in the morning after it gapped lower with more than 6,000 December $34 ITM calls bought to open (ITM Calls = High Delta = Very Bullish) as well as large sales of the Decemebr $34 puts that sent Implied Volatility spiraling lower.  CBI has longer term trend support near $36 and the $3.6B Co. trades 10.77X earnings, 0.69X sales, and 2.73X book with 15% EPS growth seen for FY13, so a cheap value name and a history of strong operations.  In this case it was one where I would not own buying the stock at a $33.40 cost basis, so selling December $34 puts to open was the way I decided to play the name.I have to wrap this up because a friend just let me know he lost power, so I may not be far behind, but hopefully this post was educational/informative of another way to utilize options flow in trading.