Europe is not healthy whether looking at the Debt Crisis, Political Uncertainty, or the Poor PMI and Other Economic Data-points.  In an effort to risk exposure to Europe I suspect the first stocks that will be sold by Institutions are the ones that will be impacted the most by the recession in Europe, and although we saw quite a few optimistic Q1 reports and forecasts, it seems the depth and length of this double dip recession in Europe may have been misjudged by many.

I am going to lay out some charts, noting some levels and targets, of the names I came across with high sales exposure to Europe.  The numbers are rough estimates based on recent Investor Presentations, and mostly looking at long term charts with weekly candles, strictly price patterns, doing away with all of the other indicators.  I surely will miss quite a few names, and feel free to contribute others.  I will note the % of Sales from Europe with Each Name.  Many of these names are Large Caps and considered fairly good values with high dividend yields, but as history has shown, cheap can get cheaper.  If not interested in shorting, consider the target levels as a better long entry at least.

Philip Morris (PM) – 41% of Sales – $86.16 – A near parabolic move the past few years, but now threatening a trend break off the 2011 lows.  Short Below $85.50 with $83.50 Initial Target, while a Break of that Level Can See a Slide to $79.

McDonald’s (MCD) – 39.7% of Sales – $91.87-  MCD has already began to feel some pain and near a major trend break on the weekly, first Fibonacci at $89.25.  A break of that level targets a return all the way to $81.25.

Kraft (KFT) – 32% of Sales – $39.06 – KFT currently is re-testing a key breakout and the Food stocks have been strong, but in a weak market a return to the $35 long term trend support level would align with a re-test of the 2011 breakout.  Short at $39 with $35.50 Target, Wrong Above $40.

DuPont (DD) – 25% of Sales – $52 – DD is another stellar Co. but a break of short term trend support, say $51.50 and a move back to $48.50 the Target, and Plenty of Resistance Overhead at $54 and $55.

International Fragrances and Flavors (IFF) – 35% of Sales – $58.32- IFF forming large descending triangle and failed at resistance recently.  Short Below Week Lows at $57.50 with Target 1 at $55, while Return to $51 Possible.

Intercontinental Excahnge (ICE) – 40% of Sales – $125.05 – ICE is in this rising wedge long term and sits on its 50% Fibonacci.  Short Below $122.50 with $112 Target.

IBM – 33% of Sales – $200.60 – IBM with a tight rising wedge that appears long overdue to break.  Playing it safe would look to short below $196 for target 1 at $188, Target 2 at $182.50.

Owen Illinois (OI) – 40% of Sales – $21.84 – OI shares topped out right at a re-test of a major breakdown from 2011 level, and look ready to roll right back over.  Only problem here is limited downside remains, target of $20.

AutoDesk (ADSK) – 40% of Sales – $36.18 – ADSK chart looks real ugly, earnings next week, broke uptrend to start this week.  Shares could slide back to $32.85, or even $30.50.

Pall Corp (PLL) – 39% of Sales – $57.91 – PLL with a long channel up and a move below $56.20 Targets $53

Illinois Tool (ITW) – 31% of Sales – $56.33 – ITW is way extended from its long term trend support, and is showing signs of topping.  A patient player waits for $54 to break with a target return to $49, while aggressive short can enter here.

Accenture (ACN) – 44% of Sales – $58.70 – ACN has already felt the pain thanks to the CTSH report, so actually like this one on weakness as a long near $55.50, as the stock is worth $70.  A short can likely squeeze 3 points out of it here still.

Priceline.com (PCLN) – 45% of Sales – $681.11 – PCLN set up well as a short today on its morning move through $700.  Trend support and 23.6% Fibonacci both point to $625 as a target.

Harman (HAR) – 60% of Sales – $42.08 – HAR put in a triple top and $39 target for trend support, while it could get ugly and look to form a horizontal channel, extending back to $29 support.

Borg Warner (BWA) – 56% of Sales – $77.29 – BWA first support comes in a $73, and below that can slid back to $65.

Johnson Controls (JCI) – 35% of Sales – $31.79 – JCI shares trading in a tight range, but below $31 this can get nasty back to $26/$28 range.

Western Union (WU) – 40% of Sales – $17.28 – WU looks ripe to roll over nad fall back to familiar support at $14.50/$15

Coca Cola (KO) – 22% of Revenues – $77.41 – KO is loved but is very extended, a soft drink stock rarely goes parabolic.  Short 1/2 here at $77.40 with a target return to $72 and add 1/2 if it reaches its $79.30 Fibonacci extension target.

Paccar (PCAR) – 36% of Sales – $39.45 – PCAR has already come down quite a bit and may want to wait for a weak bounce back to $42.50 as $37.50 is trend support, so reward/risk not as favorable here.  A break of $37.50 and $35 the next stop.

Human Genome Sciences (HGSI) is a hot stock this morning with shares gaining 100% after announcing Glaxo (GSK) made a $13/Share Offer, a deal valued at $2.58B, and one that HGSI rejected.

The news comes less than 24 hours after a large, unusual bullish spread traded in the HGSI options yesterday, one that I highlighted to clients with the following note:

“Human Genome Sciences (HGSI) building a long base along the $7 level, and a name that has previously seen active sellers in the April $8 and $7 puts.  Today, a trader buys 5,000 January 2013 $8/$15 call spreads and sells 5,000 of the $5 puts, net $0.60 debit for the spread, a bullish trade.  The $1.45B Biotech was trading at $30 last Summer and now trades 2.8X cash value but with a lot of debt and 22.3% of the float short.  UBS initiated Neutral on 4-12 with an $8 target, and a buyout is the most likely positive outcome for shares.  HGSI’s Benlysta for lupus was approved in 2011 as the first new treatment in 50 years.  HGSI has two drugs in the pipeline in phase 3 trials with results expected in late 2012, Albiglutide for type 2 diabetes and Darapladib for acute coronary syndrome.”

This $300,000 trade that will be worth $3M with shares at $14 is sure to receive a lot of cries for a SEC investigation due to the timing, but I would argue that although the timing of the trade makes this look really suspect, the trade really was just a perfect reward/risk trade opportunity in a name that has been seen for a long time as having takeover potential.  If one had Insider Trading, it is unlikely to go out to January 2013 options the day before a deal.  I would argue that the 20,000+ April 7 and 8 short puts in Open Interest rescued by this announcement are the more suspect trades, occurring earlier in March.

I noted to clients yesterday that the trade was very bullish and HGSI gave a clear $7 level to trade against, so the reward/risk for going long the stock based on this action was clearly a favorable trade, and my inbox is filling up with thank you’s this morning!

Whether the trade was Insider Trading or not, that is really of no concern to me, because these large trades give the opportunity for us to see into Institutional strategies and allow us to piggy-back the “smart” or sometimes possibly “cheating” money.

It will be really hard for the SEC to prove this trade was based on Insider Trading, so I take the side that it was just one hell of a good trade!

The S&P hit 1,414 yesterday which is getting very close to the upside targets of 1,420 and 1,435 and the market trend remains strong to the extent that it has been a very tough tape to short, not many individual stocks providing good reward/risk short opportunities.

I still see further upside for markets through April options expiration, but feel the old adage of “Sell in May and Go Away” will hold true again, although it is good to prepare earlier, and most of the large put positions I have tracked are in the May and June strikes.

Many often ask me if VIX calls are a good hedge and I say no, I simply think the VIX is broken and do not like to trade the derivatives of a derivative.  I find better hedges with puts and the SPY and IWM.

Although many are noting how cheap hedges are due to the low VIX, the skew is actually very steep, so strategies can take advantage of selling the “over-priced” puts and without requiring margin with a ratio spread, a put butterfly spread is one that offers a good amount of “bang for your buck” as a hedge.

I posted this one in my Trading Hub chat-room yesterday, the May $139/$132/$127 unbalanced put fly spread for a $0.95 debit.

Market corrections are usually 3%, 5%, 7% or 10% and utilizing SPY 141 the correction levels would be 136.77, 133.95, 131.1, and 126.9.

This spread captures profits on the trade with SPY below 138.05, max profits at SPY 132 (which would fill a gap from 2/2), and as an unbalanced put fly it reaps profits if the market really “shits the bed”.  A move below 127 and the put fly gains over 100%, at 132 it gains 500%.  I like these spreads as hedges because the reward/risk exceeds 1/1 and you can hedge long positions more efficiently without going into the Greeks and looking for perfect Delta hedges, etc.

I will start by saying this could be a stretch, but is a thought that entered my mind due to recent options activity in Raytheon (RTN).  Remember that back in the day unusual options trades came before the 9-11 Attacks with put options in airlines, and ahead of the Bank collapse with puts in the Bank stocks.

The contracts being targeted every day in Raytheon (RTN) are the May $52.50 calls, and have a constant bid every day.  The action began on February 9th with 20,000 bought to open around $0.70.  Another 10,000 traded on february 22nd and added to Open Interest, and another 8,000 on February 29th, now 28,202 in Open Interest and priced at $1.25, solid gains from the original buy point, but traders holding the positions.  There has also been action in the May $50′s with buyers, 5,025 now in Open Interest.

Iran has been in the news frequently, and plenty of reports suggesting the ability for their missiles to reach the US eastern border is near, or possibly already an option.

Raytheon (RTN) is a $17.17B defense Co. trading just 9X earnings, 0.69X sales, 2.1X book and with a strong 3.4% dividend yield, so the positioning may also just be a value call, or someone feeling there could be M&A in the defense industry.

The Iran angle comes in with Raytheon being the leading manufacturer of missile defense systems, as well as missile systems and other businesses that can be found here: http://www.raytheon.com/businesses/

Raytheon shares have acted very strong lately in up and down tapes and near a break out past 2011 highs, a move that has a measured move target to $61, while 2010 highs at $57 a next resistance point.

Regardless of the why, option traders have been positioning the last two weeks for this Defense stock to rally higher, and have been right to this point, and plenty of potential catalysts between now and May expiration

I am by no means predicting an attack on the US, a War with Iran, or any other outcome, but it is something that has to be considered as a possibility, and where my mind has ventured after seeing this continuous activity in the call options.

As most of you know by now I look at every stock on three elements, fundamentals, technical view, and money flow sentiment, specifically options activity.

IBM was a perfect example today, a chart that me and just about everyone else was watching, shares had consolidated in a tight range for weeks after jumping on earnings and were pressing up against the December $194.87 highs.  The larger picture does show a large rising wedge forming with $200 resistance, although the measured move of the $177.50/$195 range measures to a target of $212.50.

IBM fundamentals pass the test, a long history of delivering strong results and trading at a fairly cheap value, and has not seen the upside action that other Large Cap Tech names have recently seen.  Also, the catalyst of Buffett to appear on CNBC Monday and recently disclosed a 5.5% stake was an added value.

IBM call action started around 9:55am, and not small-timers looking for a breakout, big Institutional buyers of the March $200 calls began to pour in and the IBM breakout alert triggered at 10:07am with those March $200 calls at $1.10, although the first batch of 2,000 were bought at $0.92 and started a flurry of action with more than 17,000 of those contracts traded today.  Below is the intraday chart of the March $200 calls with volume.

We decided to buy these March $200 calls at $1.20, wanted to see some more action and confirmed volume breakout.  Shares really caught fire and the calls were an instant winner, and we closed 1/2 the calls at $1.75 as shares quickly got above 197, and exited the second 1/2 of the calls at $2.45 with shares hitting $199, simply thinking that too many eyes were on the name and $200 was too obvious of a target.  The piecing out resulted in a nice 75% gain on the position that was held for just over an hour.

All the elements (Options Flow, Technicals, Fundamentals) Added Up and the Result is a Great Intraday Trade, and these are the trades I look for every day for members.  Although I usually look for 3-5 day holds, when you get a move this fast I prefer to take the gain, and move on to the next trade, and seeing how IBM did not participate in the late afternoon market rally, it looks to have been a good decision, for now….

(Prophet Charts)

With the markets being closed for President’s Day I have some free time to clarify the Options Hawk subscription products.

First, any one that has used my service can validate that it is the single best full-service trading product in the market with an options focus.  I provide a complete product ranging from pre-market reports to after-market reports with a live trading chat throughout the day where hundreds of actionable content posts are delivered daily.  I spend hours upon hours on stock research and everything is laid out in a very organized setting on the Trading Hub Member Page.  Details of what MAX Members receive are here http://www.optionshawk.com/services_detail.php

However, my products are not for everyone.  I am not one of these “Options Picking” services that sends out a few picks per day or week.  I am not the be-all and end-all of trading services that requires no work on your part, there are no free lunches.  I see many of these services posting daily on how great of a January 2012 they had, up 60% or whatever, when I also know these same services completely blew-up last July.  These services often only know one trade, long calls, and a 60% gain in January followed by a 40% gain in February is nice until that 80% haircut comes in March, they just do not know any form of risk management nor how to play the market from the short side.

These products are irresponsible, it is impossible to know the trading style or the individual risk profiles of all of your subscribers, yet you are recommending the exact same picks to everyone.  Traders must take responsibility of each of his/her trades, and know the inherent risks associated.

I am also not one of the stock-pickers playing these illiquid sub $10 stocks and day-trading these garbage names for $400 here and $500 there.  That is just not enticing to me, I look for 50%+ gains in days with options, no interest making those little figures.  To each his own, but I’d rather have a sound reason for making a trade then trying to pump-up these penny stocks and taking advantage of market inefficiencies.

I was a game-changer when I launched my service, now it seems everyone has a live trading chat.  However, my chat is 95% me and I filter the rest, only adding actionable content that other users post, to avoid the fluff seen in most chats and now across twitter.  Others can copy the business plan (ask Stock Monster who is now utilizing the exact business plan I created for them 3 years ago, but I never got around to taking legal action), but one thing that cannot be copied is me, (well I’m not sure how far cloning has come along).  I am always coming up with new ideas to enhance the features for members, and after using options flow to find trades for the past 5 years I am as much as an expert as anyone at reading flow.

I focus more on providing the actionable content, and clients can selectively choose trades that best line-up with his/her views, often as simple as “I was liking that name too, and now this gives me further confidence to enter that trade.”  I do run a mock portfolio with the trades I consider the highest probability for success, combining picks from monitoring unusual options action, technical trades, fundamental based trades, and earnings strategy.  It is done very well to say the least, started at $100,000 in June 2009 and now sits at over $2,200,000.  I know that seems unreal, but every trade is tracked and can be found in the archives of the live chats with entry/exit, and I post quarterly results on the website at http://www.optionshawk.com/cms.php?page_name=OptionsHawk_Performance . Yes, there will be some slippage on entry/exit with option spreads, and also does not take into account commissions, but the point is my methods are wildly successful.

I have turned away countless number of prospective subscribers for multiple reasons.  One common reason is they are looking for these Email and/or Twitter picks to be delivered, but I simply do not have time to be able to take my focus away from the Trading Hub, it would be unfair to my paying members.

Second, traders are often seeking that “Golden Ticket” and saying they have $20,000 and ready to trade options.  I simply tell them the account is too small to take on the risk of options and they are better served investing for the long term in high yielding stocks.  This also goes back to the earlier note of not being an “Option-Picking” service.

My services are not for those who are not willing to put the work in to become better traders, and looking to blindly follow picks.  I am also not an educator, that can be found elsewhere on the internet and I know Steve Place does an excellent job at Investing With Options and highly recommend him if looking to learn more on options trading.

The majority of my clients are Hedge Funds and High Net Worth Individuals that are already established as traders.  My service is providing an edge, a method of idea generation to capitalize on high reward/risk ratio trades.  I have a great background in Fundamental Analysis and Technical Analysis, and combining it with my methods of tracking options order flow has been a very successful combination.  Less experienced traders are quickly over-whelmed with the amount of content I provide, and can get frustrated, but my target market wants to see everything I see, so I am generally posting at minimum every 5 minutes.  I excel with customer service, clients have full access to me throughout the day in the chat, although as noted earlier I do not have the time to educate, but can clarify any uncertainties.

I have many clients that have been with my service for more than 2 years, and it is all about knowing how to use it.  I provide in depth Investment Research with a focus on Institutional and Unusual Options Order Flow, and leads my clients and I to names we would not have found simply by looking at charts or P/E ratios, I combine 3 important pillars of trading.

Sometimes I am asked why not just trade, and forget about running a service, which is a fair question and often debated.  My first response is why not do both, a steady flow of income on top of trading profits, and there is plenty of liquidity that sharing picks has little interference on my trades.  Second, and most importantly, is that I like to share.  I share so much free content on Twitter and on my site, and have always been a selfless person that is constantly looking out for others before myself.  However, I also feel that hard work deserves to be rewarded, and hence a subscription service for serious traders looking to gain an edge in the markets.  My work-ethic is unparalleled and it shows in my work.

It may sound unusual coming from a stock-market junkie, but money is not all that important to me, I have everything I need and then some, and the recognition of great work and fame is much more important to me.  I have been published in Bloomberg, Reuters, Dow Jones, Wall Street Journal and countless other global newspapers.  I consider this a nice achievement for having started just 2.5 years ago on an aluminum chair in my room with a laptop and an external monitor, and building up a business that has more than doubled each year.  This has happened without me ever promoting and advertising, just word of mouth really.  If I really wanted to go for it I could easily start up a large company and bring in 10X what I do now, but for now I am comfortable being the small-business, although my mind is full of so many great ideas that I just cannot undertake on my own, I may one day need to look into expanding.

Hopefully this post clarifies what OptionsHawk is and how to best use my products.

I’m not trying to sell anyone, I offer 10 day trials and some find it is the most amazing product in the world, while others are looking for something less intensive, and I completely understand everyone has a different situation.  I have posted many of my testimonials on the Home Page from clients, worth a read if you have not seen.  Also I never really use the Investimonials Site (and have converted to a new twitter handle), but also some reviews on there with 11 at 5-Stars and 1 at 4-Stars http://investimonials.com/twitter/reviews-twitter-optionradar.aspx

I just needed to lay this out today as something I can reference when I receive all these questions, and had the time to get it out today.

One of the toughest concepts for traders is to keep your winners and let them ride, and cut your losers.  This applies to trading options, just as it does with stocks, although options allow more flexibility to adjust positions while winning, or while losing.

Salesforce.com (CRM) shares have made a strong run lately, and a name that I picked up unusually large call buying in well ahead of this run, and have since seen these trades adjusted as shares move higher, so it is a good example to look at.

On January 18th with Salesforce.com (CRM) shares at $107.50 I highlighted very strong action in the February $110 calls with 7,500 bought at the $3.70 to $4.20 range, aggressive offer side buying, a position that amounts to approximately $3,000,000 given the average weighted price of the calls.

On January 19th Salesforce.com (CRM) shares jumped higher from $107 and closed near $115, immediately a big winning trade, shares boosted by a strong earnings report from F-5 (FFIV).  The buyer of the February $110 calls stayed the course and remained long the $110 calls.

On January 23rd with shares still around $115 the trader sold 2,300 of the $110 calls at $9.25 and bought 5,500 of the February $120/$135 call spreads at $3.08, essentially taking $433,500 off the table but initiating a $1,694,000 position.

On January 26th the trader peeled back another 910 February $110 calls at $9.51, netting $865,410.

On February 8th the 5,500 February $120/$135 call spreads were closed at $4.29, chalking up another $665,500 gain.  However, the trader rolled the position out to March $125 calls, bought 7,500X at $6.50 to open, a $4,875,000 position with shares near $122.50.

On February 13th the March $125 calls were sold to close at $12.70 ($9,525,000), a gain of $4,650,000, but once again the trader adjusted the trade, now opening 11,020 March $135/$155 call spreads at $6, a $6,612,000 trade.

The original $3,000,000 investment is still holding around 3,000 of the February $110 calls worth around $6,500,000, while a $6,612,000 position remains open in the March $135/$155 call spreads, and interesting to watch this one with earnings coming up on 2/23 after the close.

This trader caught this move with perfect timing, and has been making all the right moves, so if this large position remains open into earnings, would you really bet against CRM, even with the position being “house money” at this point.

The chart below shows how the trade has caused a major disparity in call to put open interest in March.

I know I should not have been shocked, because these guys on CNBC’s Fast Money are constantly caught in lies, and in the Internet Age it is not very hard to get caught in a bold-faced lie.

Today we can look at Nuance Communications (NUAN), which was set to report earnings after the close, and Dr. J makes comments including:

“Yes, you do buy NUAN into Earnings” , “I own it with OTM Call Options” “I buy Calls or Call Spreads”

On a side note, Cortez was bullish, a major warning sign.

Video is Here: http://video.cnbc.com/gallery/?video=3000072380

No surprise that with shares tanking 12% on earnings, during the 5pm show Dr. J states that there was no reason to own NUAN, and there was not any Institutional Options Action.

The first statement is clearly contradicting what he had said just 4 hours prior, while the second is also a big fat lie, but not everyone would know it.

Today alone NUAN traded 59,500 calls, which is nearly 15X daily action.  Now, an Institutional options trade is generally defined by 250+ contract trades, also taking into account the contract price.  Well, NUAN had a bunch of those trades today and in recent weeks.  Today one trader sold 1,000 February 30/28 put spreads to buy 1,000 February $30 calls.  Another trader bought 1,700 February $28 calls in one lot.

Going back to 1-11-12 there was a buyer of 5,000 February $28 calls at $2.

On 2-2-12  5,500 February $33 calls were bought to open.

On 2-6 a trader bought 3,600 March $35 calls at $0.30.

Furthermore, more than 5,000 April $30 calls in Open Interest from a few big block purchases the past few weeks.

Obviously there was a lot of Institutional paper positioning for upside in NUAN, yet he conveniently states that there was none because he has already seen the outcome.

I can see expecting the viewing public to forget a call you made a week or even days ago, but 4 hours ago…come-on, have a backbone.

Clearly, a lot of paper is going to be in pain tomorrow unless shares find a way to recover.

Disclosure: We were long NUAN Feb. 28 Calls $1.30 and Sold 1/2 at $2.55 and Sold $32 Calls at $0.50 Against Remaining Position to Lock in Gains on Overall Position

Trading options on earnings is a the best way to trade because you do not always have to trade direction, you are also trading the volatility structure, and have the ability to define your reward/risk (commonly referred to as risk/reward, but I have always preferred the reward/risk ratio, just semantics)

Amazon was the big report tonight, and many were trading the options on the earnings.  I had already taken profits on a long straddle from a couple weeks ago that caught the surge in Implied Volatility the past week, and also a February (Weekly)/February $215/$175 double calendar spread opened Monday morning at $1.55 and closed today at $2.30, though it traded above $2.50 into the close and based on Amazon’s projected open, could have been an even bigger gainer.

Into earnings options were pricing in more than an 11% move, simply calculated by taking the at-the-money straddle divided by the stock price, and using the weekly options there is limited residual volatility to factor in.  For a historical view Amazon has only made an 11% or greater move once the past 5 reports, so volatility did appear a bit rich.  Shares are down 8.87% after hours.

So, now for the process:

1) You want to look at the chart to look for the potential support/resistance and magnitude of the move.  A chart has no predictive value into earnings, anyone that tells you otherwise is full of it.  You could flip a coin on whether an earnings move will be up or down and be right just as often as the technician’s view, it is just a guess.  In Amazon’s case there was clear space above $195 for a move back to the $215/$220 area, that was the upside target, while downside would see first support at $185 but do to the likely earnings move support at $173 is the downside target.

2) Into earnings it was safe to assume a minimum of a 5% move, so this gives you an upside starting point at $205 and downside starting point of $184.70, safe to say shares would be above $205 or below $184.70 to start trading tomorrow.

3) Although you can gain an edge with quality research, analysis and channel checks, for simplicity purposes I will say there is an equal probability of a given stock trading higher or lower following earnings.

4) Trade Selection: Knowing the factors above you would want to structure a trade that provides the best reward/risk ratio.  I often like to trade butterfly spreads, in this case with the levels noted above the 185/175/165 put fly in the weekly options priced $1.55 into the close, a profit zone from $166.55 to $183.45, and offering a great reward risk.

My issue is that I saw a lot of traders today in the media and across the web looking at bear call spreads into earnings, one notable one was selling the weekly $205/$210 call spread at a $1.30 credit.

To me this is a dumb trade, risking $370 to make $130, considering an equal possibility of shares going up or down, and the historical and expected move on earnings indicating that an up move likely takes shares past $210 for a max loss on the spread.  If looking to take a bearish trade on AMZN into earnings, why would you choose that strategy instead of something as simple as the weekly $190/$185 put spread at a $2.25 debit.  This trade is risking $225 to make $275 and knowing shares have a high likelihood of being below $185 on a weak earnings reaction.

If wanting to be an option seller instead of a buyer, at least sell the February $190/$195 call vertical at a $2.85 credit, risking $215 to make $285.

Picking the strategy and strikes is a big part of the battle, and entering trades with a reward/risk of less than 1 is not a smart way to trade.

In tracking Institutional and Unusual Options Activity one of the most important things to do is to look for themes.  Often this is seen sector-based, seeing unusual call activity across a group, often seen in Gold Miners, Airlines, Solar, and Home Construction before the groups make a big multi–month run.

Today a theme was seen in the Oil & Gas Exploration and Production sector with 9 different names seeing large complex option spreads (PXP was late yesterday as the 10th).  All of these spreads involved selling downside puts to buy either calls, vertical call spreads, or ratio call spreads.

All of the spreads were Delta Positive, Gamma Negative, Theta Positive, and Vega Negative.

The trades are structured to take advantage of a slow grind higher, as the upside in the ratio spreads is capped before the spreads start to lose money, and lower volatility and the decay with time work to these spreads advantage.

All of the spreads also traded with a large block of stock, and my view is that these spreads are being used as stock replacement strategies, selling puts at a level that is a value you are willing to be long the stock again, while also owning upside exposure for a move higher, the best case scenario being a move higher in which the puts expire worthless and the call spreads have value.

Many of these companies have substantial exposure to Natural Gas, so these positions are effectively calling a bottom as companies cut production to stabilize prices, but also realizing prices have modest upside potential.  M&A could also provide a lift to this group with Foreign Oil very interested in acquiring US Shale Assets and many of these names trading near multi-year lows.

Chesapeake Energy (CHK) could be a name to attract M&A interest, a name that has seen 50,000 January 2013 $35/$45 far OTM call spreads bought at $0.35 to open in the past week.

I prepared an Excel sheet detailing each of the trade, and also one detailing some of the key stats for the names involved in these trades.

Trade Details

The P/L Charts for Each of the Trades:

NFX

XEC

SU

DVN

CRZO

COG

WLL

EOG

PXP

DNR

I personally like CRZO, DVN, and XEC at these levels.  If concerned with ratio spreads for margin purposes, butterfly spreads are another way to play an upside grind in these calls.  A safer route is to utilize bull put spreads in these names, and some may wish to sell puts outright, willing to be long stock, following the Smart Money.

Many ways to trade based off this “intel”, hope it helps you make some money!

Late Addition:

Pioneer Natural Resources (PXD) with a seller of 2,500 March $90 puts to buy 2,500 March $105/$115 call spreads for a net $0.40 credit, similar to what was seen in the other names.