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. 

Fed-Ex (FDX) – A Trading Lesson in Knowing the Options Flow and Catalyst

It was an ugly day for markets with another 100+ point drop in the Dow Jones, but in the Options Hawk Trading Hub there are opportunities to make money on the long side and short side every day with constant flow of actionable analysis on the market and individual stocks.A trade played out perfectly this week in Fed-Ex (FDX), a stock that jumped 6.5% today after announcing a major restructuring and cost cutting plan, and did so on massive volume and in a weak tape.A look into my process:1) On Monday I noticed a large trade in the Fed-Ex options as the October $90/$92.50 call spread was bought 5,500X at $0.18 with shares around $86.50.  It was a large trade, and unusual with just 9 trading days remaining in October for a low Beta name to make that type of move, so I was immediately interested.2) I checked back and noticed that on the prior Friday the October $90 and $92.50 calls each traded 5,000 contracts and added to Open Interest.3) Consecutive days of speculative upside call buying in a recent laggard that reported terrible earnings and guidance definitely had me interested.  I did some research and checked out StreetEvents and noticed that Fed-Ex would be hosting a two day Analyst Event later in the week, so this was obviously the reasoning behind the call activity.4) I dove deeper into the Event and its potential implications and looked at BofA-Merrill’s, JP Morgan’s and CSFB’s event previews and realized that this was much more than a routine Analyst Day, and there were major implications as the Street was anxiously awaiting plans for cost-cuts and other measures to boost profitability.  Therefore the Event did have the potential to cause a large move in the stock, so the OTM calls made more sense at this point.5) I then looked at Fed-Ex’s valuation and chart to get a better feel for the stock, and it was fairly cheap on a forward-looking basis and most of the Street has $90+ targets.  Shares also recently had tested and held at long term trend support and were oversold, a formula where good news could easily take shares up to trend resistance at $90.6) There was time to wait to check the Open Interest change on Tuesday to ensure the positions were opening due to the Event timing.  On Tuesday I confirmed that the positions were opened and the bullish view was a full-go.There are always a lot of different potential strategies to trade into a catalyst and in this case the OTM $90 calls jumped to $1.60 today after being offered at $0.20 on Tuesday, a 700% gain, but also came with the higher risk as a lower probability trade.One trade I highlighted to subscribers was the October/November $90 call calendar which was available at $0.55 on Tuesday and closed today at $1.10, and if shares were to settle around this $90 mark for options expiration will even seeing a greater gain.This was my process for this trade and a similar process I go through 50+ times per day analyzing the options activity, the fundamentals, the technical chart, the Analyst Research Notes, and the potential catalysts.It is a great example of the type of actionable research I provide to subscribers, and how it can easily be translated into money-making opportunities.A lot of you reading this may not even be aware that I offer paid subscription services because of all the free content I put out.  I have been told I am a bad marketer because I have no email lists, no advertisements, limited knowledge of how to become search-engine optimized, and do not utilize any gimmicks to try and grow my subscriber base.  The truth is I am content with the group I have, just the right amount of contributions and many of my clients have been with me for 2+ years.  I have always believed that great products sell themselves, and so far that model has worked.There is no better place on the web than OptionsHawk offering the quality of in-depth market analysis, trading strategies, proprietary trading tools, and more in real-time.I will post the original Options Radar Report from Monday below:

Cliffs Natural (CLF) – How One Pro has been Trading the Puts

I have been highlighting elevated put buying in Cliff’s Natural (CLF) recently and it is another great display of sticking with winners, but adjusting your trade along the way to take partial profits.The anatomy of the trade: (Shares Down to $33.70 from $41.40 in this Period)The Recent Trader that has been riding CLF lower began on 8/22:8/22: Trader Closed 1,000 August $42 Puts at $1.86 and Opens 1,000 August $41 Puts at $1.118/24: Trader Buys 2,500 August31 (Q) $40 Puts at $2.12 and Closed 1,000 August (W) Puts at $2.758/27: Trader Closed 2,500 Aug. (Q) $40 Puts at $2.39 and Opens 3,000 Aug. (Q) $39 Puts at $1.618/29: Trader Closed 3,000 Aug. (Q) $39 Puts at $2.39 and Opens 4,000 Aug. (Q) $38 Puts at $1.608/30: Trader Closes 4,000 Aug. (Q) $38 Puts at $1.95 and Opens 10,000 Aug. (Q) $37 Puts at $1.138/31: Trader Opens 3,000 Sep.07 (W) $37 Puts at $1.549/4: Trader Closes Sep.0.7 (W) $37 Puts 2,000X at $2.18;  Open Sep.07 (W) $36 Puts at $1.45 2,000X; Traders Also Open 5,000 Sep.07 (W) $35 Puts 5,000X

Methods to My Madness – Trading Options Flow

As many of my followers know by now I monitor the options market for large Institutional trades or unusual trading (5X+ daily average) in a stock’s options.  I field a lot of questions about this style of trading and wanted to write up an overview to better explain my methods.  This is in no way going to be formal, nor aimed at novice traders, but it will be something I can reference people to in the future.  I am going to structure it in a Q&A format based on previous questions I have seen and can always add to it in the future if there is something I miss.  This is a method I have mastered over the years and could write a 500 page book on it, but will try to hit the main points here without giving away too many secrets.

Everyone has their own methods of trading and it is not worth arguing that one method is better than another, it is different for each individual.  I have found a lot of success with this unique style and find it to be the single best way for idea-generation.  With that said I think everyone should at least want to know where the "smart-money" is positioned in the options market before taking a trade, and it is important to keep an open mind and include options order flow with your technical and/or fundamental view of a stock.

What is the rationale behind following options order flow?

I utilize the unusual and large options activity as a tool for idea generation.  Even on days when the market appears slow there are always exciting traders happening in the options market, and for the most market the hot options action leads you to the stocks that are going to make a move.  The idea is similar to equities where you want to be buying stocks that Institutions want to own, and selling stocks that Institutions do not want to own because the large money traders control the majority of movements in the market, whether it be a Hedge Fund, High Net Worth Trader, or Money Mgmt. firm.I tend to think of it in the following manner:  Institutions have the best access to companies and the best tools to analyze technical, fundamental, and other factors that determine a stock’s future price move.  Therefore by being able to see where the "smart money" is positioning I am able to piggy-back on their research and analysis without having to spend the money or time to perform an in depth analysis of every stock.  Like it or not, if you are trying to buy stocks that Institutions are looking to sell, or short stocks Institutions are looking to buy, you are going to lose. 

Of the 2,000 US stocks trading 100,000 shares a day, over a $300M market cap and are optionable Institutional ownership is as follows: 75% of stocks have 60% or more Institutional Ownership, 66% have 70% or more Institutional Ownership, and 50.75% have 80% or more Institutional Ownership.When it comes to looking more at unusual trading rather than large trades the line of thinking is a bit different, and somewhat dark.  The simple fact is that the market is not efficient when it comes to information dissemination and there will always be cheaters.  A lot of the time small-time traders come across certain nuggets of information that will materially impact a stock’s price, and are smart enough to utilize the options market to leverage their trades and make larger percentage gains.  It also touches on Insider Trading, which remains fairly rampant, as does the lack of firewalls between the Research and Trading arms on Institutional desks where I frequently see unusual options activity right ahead of an upgrade/downgrade.


What are the important variables when looking at options order flow?The basic premise behind order flow is that you are looking to see whether option contracts are being traded on the offer (bought) or the bid (sold).  You can also look at the bid-ask spread and compare it to where the order executes in time and sales to see the aggressiveness of a trader to want to get into a position.  Often on the more illiquid names bid-ask spreads may be more than $0.50 wide and if a trader is paying the offer he/she is either foolish or has a lot of conviction the stock is moving higher, and if done in large size it is usually the latter.It is also important to watch the resultant volatility movements when option orders are coming through as generally aggressive buying of contracts will send Implied Volatility higher, specifically in the month where the action is hitting.  On the other hand when a lot of size is selling on the bid Implied Volatility tends to take a dive lower, and this is rather self-explanatory.One rebuttal I often receive is that there is always someone on the other side of a trade.  Well, yes, but that completely misses the point, and this is about what and how much a trader is willing to pay to get into a large position, which inherently is a measure of conviction.  Furthermore, the other side of the trade is often a market-maker who will be on the other side of the options trade, but hedge off Delta-risk in the underlying stock, and therefore is not taking on directional exposure, but the Institution is in fact making a directional call.


Does it pay to always following the large options order flow?

No, there is not a sure-fire way to make a profit every time, but over time I have proven that it is a very effective method of catching large moves very early on, and it also depends on your planned timeframe for trading as often you can catch a quick 30% move intraday and take profits without riding out the position with the Institution.Today along in the Options Hawk Trading Hub chat for subscribers I noted hot MolyCorp (MCP) call buys of the August weekly $10 calls and then waited for an intraday trend break.  The calls were trading $0.40 and closed the day at $0.80.  Also today in Juniper (JNPR) I highlighted October $19 call buying at $0.65 and those closed the day at $0.92.  There are opportunities like this every single day.Also, Institutions are also wrong sometimes, so not every trade is going to work-out, it is a market after-all, and there are no guarantees with so many unforeseen factors in play.

I try and update some Highlights on my site as examples



How do I know which ones are best to follow?

Generally speaking the larger the trade, the better probability of it becoming a winner because as noted before it shows the amount of conviction and I often refer to those as "High-Impact Trades".  Also, a trade that involves more risk, such as a bullish risk reversal, tends to be one that is very confident and are often the best to follow.  Another secret that over the past two years has an amazing success rate and large profitable trades are to watch for large put sales in Biotechs, a trader willing to be long stock, effectively calling a bottom.  A few recent examples are PCYC where I started to see this with shares at $8, now at $66.67 and ARIA at $6, now at $20.30.  As a bonus for reading a few recent put sale names in Biotech include LGND, EXEL, THLD, and IMGN off the top of my head.

My method involves not only wanting to see bullish or bearish order flow, but also having the order flow’s directional view align with my fundamental and technical analysis view on the stock.  I have a great background in both fundamental and technical analysis, so the options flow is used as the confirmation factor on my view  to initiate a position, and when all 3 factors align I usually am left with the highest probability directional trades.

Since I have created a ton of tools and have a great memory I often do not jump into a trade the same day that I see the large trade, but instead will wait for the stock to either break past a key resistance level or fall back to a support level where I can enter the position at a better price than the "smart money".  I always have past order flow in the front of my mind daily when scanning through stocks so I know which ones I want to get involved in.  Over the years I have found that the large options order flow works out a lot more often than it does not, but the timing of the trades are rarely perfect, which can be said for most people, so it rarely is necessary to chase a trade right away.


What are some other considerations when analyzing order flow?

Spreads – Many option traders are done in spreads with vertical spreads most common, but also see butterfly spreads, ratio spreads, 3 way spreads, risk-reversals, synthetics, and more.  Overall the analysis is the name when determining how the spread is positioning.

Hedging – A lot of Institutions use options to hedge and it is not always a perfect science when analyzing order flow, but you can put the odds in your favor.  First, if an option block trades as a fresh buy-write, synthetic, married-put, etc. I can determine this with the time and sales of the equity blocks.  However, often option trades are hedging former holdings so there are a couple of factors I look at.  If a stock is in a strong uptrend and I see put buying I am not going to automatically jump onboard as I can understand the desire to own puts to protect profits.  Instead I will set an alert for a break of a key support/trend level that would spark my interest in owning the puts.  And vice versa, if I see call buying in a name in a downtrend I often will wait for it to break above a key resistance level, unless I have a great fundamental reason town. 

Also I always take into account the short interest and more specifically the recent changes in short interest.  If short interest is climbing and I am seeing call buying I have less confidence in the action as the call buys are more than likely protecting short stock positions."Hidden Spreads" – A block of calls bought is not always bullish if tied to short stock, actually that makes it a synthetic long put, and the same applied to a block of puts bought not being bearish if tied to long stock because that makes it a synthetic long call position.

Ex-Dividend – Liquid stocks will see heavy ITM call active ahead of ex-dividend dates in an arbitrage strategy often called dividend stripping.  I cast aside this action as it is not directional and can only be efficiently replicated by large institutions.

Catalysts – One of the most important things to pay attention to is upcoming events that can cause a move so you can really dig into the reason of "why" the trade is being made.  It can be FDA Events, Earnings, Analyst Meetings, Retailer Same Store Sales, or other events.  Sometimes it takes a bit of creativity such as when Homebuilding stocks see unusual action ahead of New Home Sales or Pending Home Sales economic releases, or unusual action in Gold or Treasuries (TLT) ahead of a Fed announcement, or even names that will move in sympathy to other names that have upcoming events.  It often takes a lot of research and digging, but is important to know.


How can someone follow order flow?

There are a variety tools to utilize and mainly you need a source of time and sales data whether it be directly from the exchange, via your broker (ThinkorSwim now offers time & sales on options trades), via Bloomberg’s various functions for those via terminal access can use TSM (Trade Summary Matrix), or with a programs offered via Trade Alert or LiveVol.  

It also helps to have floor contacts at the CBOE, ISE, PHLX and AMEX where many of the trades take place.Many analyze the activity incorrectly and can lead to the wrong trade like in May when I had a back and forth on Twitter regarding what I saw as a large put sale in Weyerhaeuser (WY) as bullish, but another (will not mention the name) suggested it was a bearish put buy because he did not look at the resultant movement in the implied volatility.  Since May, Weyerhaeuser (WY) shares have climbed to $24.60 from $18.

It takes years of experience and there are a lot of intricacies to this "art", so the best way is to look into the subscription services I offer at Options Hawk that focused on analyzing order flow to come up with trade ideas, and also offers a lot of additional services with tools I have created.I am always innovating and have recently created an Options Expiration Pin Excel Sheet for designing trades around expiration trading, an Excel sheet of bullish/bearish existing Open Interest of sizable trades broken down by Sector, and working on an Earnings Factor Model that will help anticipate not only magnitude of moves on earnings, but also the direction.

For those reading this I just opened up access to the August 7th Market Recap Report on the site if you scroll down to that date:

It is an example of the types of analysis I put out each day.I hope you enjoyed the read, learned something, and maybe generated an interest in this style of trading!Please leave comments if you have questions on anything I missed and I will try and answer in due time.

Apple (AAPL): Dissecting October Options Action, Trader Up $15M Presses for More

Apple saw a few large blocks of calls and puts trade in October options on Monday and Tuesday this week, much of which was adjusting former bullish positions highlighted, but wanted to take a look at the positions with a focus on the new positions that are currently open.  I do not have any visuals this time, all data, but very interesting activity.Overall in Open Interest Apple came into Friday with 1,807,886 calls and 1,255,086 puts open.There were not any large impactful trades Friday in these options and into Friday the notable Open Interest (rounding) was at the $600 calls (13,825), $630 Calls (20,975), $650 Calls (18,810), $680 Calls (10,900), $700 Calls (17,555), $710 Calls (10,275), and $755 Calls (29,800).In the puts the notable Open Interest was in October $600 (11,120) and October $550 (19,470)Looking at each of these strikes individually to see this month’s change in Open Interest:

  • October $600 Calls Open Interest 14,472 to Start the Month – Relatively Unchanged
  • October $630 Calls Open Interest 3,500 to Start the Month and 13,000 Added this Week
  • October $650 Calls Open Interest 11,560 to Start the Month So Just Under 5,000 Added this Week
  • October $680 Calls Open Interest 1,670 to Start the Month and More than 6,000 Added this Week
  • October $700 Calls Open Interest 9,074 to Start the Month and Just Under 5,000 Added this Week
  • October $710 Calls Open Interest 25,512 to Start the Month so Roughly 16,000 Closed this Week
  • October $750 Calls Open Interest 9,759 to Start the Month and Roughly 19,000 Added this Week
  • October $550 Puts Open Interest 6,650 to Start the Month So 13,000 Added this Week
  • October $600 Puts Open Interest 5,620 to Start the Month And 3,300 Added this Week

Now looking at the trades made this week and the resultant impact to Open Interest:

  • August 20th – 10,440 October $475 Short Puts Bought Back (OI was 14,337) at $0.84 and 5,520 October $550 Puts Sold to Open at $2.97; 10,440 October $710 Calls Closed at $14.10 and 10,440 October $750 Calls Bought at $6.50 (Accounts for Notable OI Changes Above).  Also 5,220 October $615 Calls Closed at $61.85 and 5,220 October $630 Calls Bought at $51.45 to Open.
  • August 21st – 6,000 October $550 Puts Sold to Open; 6,000 October $615 Calls Sold to Close at $56.91; 6,000 October $630 Calls Bought to Open $46.80 (Accounts for Full $630 Call OI Change with Prior Day); Also, 12,000 October $710 Calls Sold to Close $11.52 and 12,000 October $750 Calls Bought to Open $5.05

Summary:On July 5th a large Institutional trader sells 10,440 October $475 Puts to Open at $4, a $4,176,000 credit, and buys 22,440 October $710 Calls at $7.65 for $17,166,600, a net debit of $12,990,600.  Apple closed trading on July 5th at $607.33.Furthermore this position was also an adjustment as the trader bought back 9,250 October $450 short puts at $2.66 and sold 10,800 October $725 long calls at $6, a $4,019,500 credit and rolled into this new position on July 5th willing to be long (short puts) at a higher cost ($475) and wanting a higher Delta on the long calls.With the August 20th/21st adjustment the trader bought back the short October $475 puts and Sold the October $550 puts to open, net on that trade +$762,480 in credit.  The trader closes 22,440 October $710 calls for a Net $28,557,090 and opened 22,440 October $750 calls for $13,890,000.In conclusion this trader has netted more than $15 million since the July 5th trade, and that trade had already been profitable from a prior adjustment.  As it stands now this trader is short the October $550 puts and long the October $750 calls in size as we near the launch of the iPhone 5 and iPad Mini.Apple still trades at a very cheap valuation ex-cash and this traders sees more upside, so the question is, Would You Bet Against a Trader that Banked $15M in One Spread in A Month and a Half?I would not….and this should also be a lesson about "Let Your Winners Ride" and Also for Option Traders how to Adjust Positions and Stick with a Trade!And then there is that other trader that added 13,000 October $630 calls this week, rolling up from the $615 strike.Apple should be heading to $800+ in the next few months…. (CRM) is Not Rich on Valuation – Shorting It is Dangerous

Similar to the same types that like to say (AMZN) is rich on valuation, the same is said about (CRM), and usually the same indicator is used to form this opinion, the P/E (CRM) trades 74X forward earnings so it immediately is labeled as over-valued by those that are using very old methods of valuing companies, and often apply the wrong metrics.

 I am a firm believer that every sector, or sometimes even industry should be valued on its own metrics because the basic inputs of earnings per share, revenues, margins and sales are often not indicative of the underlying health of a company.  Also, a P/E ratio is never appropriate for an accelerating growth company, and even worse if you are using trailing P/E’s, so please throw away the college textbooks and enter a new-age of valuing companies.

 A long-term investor in a growth company at the early stages of a thematic trend has to use these metrics to stay disciplined with the long term valuation outlook.You see these industry-specific, or sometimes even firm-specific metrics often quoted, whether it be Google (GOOG) with paid clicks or various retailers with same store sales growth.  The most important part of an earnings report is often hidden deep within the numbers, and it is helpful to develop these industry-specific metrics to better value companies versus peers, which is much more important than valuing a company versus the entire market standard because we want "Apples to Apples" not "Apples to Oranges".Getting back on track to (CRM) we are looking at a Company with a market cap of just $20.3B, and a clear leader in cloud computing for the CRM market where cloud is only 25% of the market with revenues of $17B/year.  

We are still fairly early in the transition to cloud and CRM is likely to see 25 to 30% growth for years to come.  CRM is set to make $3B in revenues in 2013, and based on market opportunities and the growth outlook we have a Company making $11B in revenues in 5 years.  So, that is for the longer term view, but looking even at current valuation shares are trading at a major discount to its historical average.Using FY13 numbers CRM’s 25X EV/FCF over Billings Growth multiple is at 0.86, which compares to its 3 year range of 0.8 to 1.3.  Looking at a peer like Red Hat (RHT) utilizing the same metric and it is at 1.4 (23X EV/FCF and 16% Billings Growth).In conclusion, for those that feel CRM is over-valued at $147.23/share I would argue it is not only under-valued for the long term opportunity, but also at one of its cheapest levels to own over the past 3 years.Furthermore, considering CRM is completely dominant in its market and making a lot of smart, strategic acquisitions, its $20.3B market cap does not put in out of the realm for a potential acquisition target.  Consider that Cisco (CSCO) has $45B in cash, Google (GOOG) has $34B, Oracle (ORCL) has $25B+, and Microsoft (MSFT) has $55B+ in cash I think that Large Cap Tech will be going on a spending spree and CRM is the best target to drive growth.

CRM reports earnings this week, and on any weakness down near $120 it is surely a buy, and more than likely a good buy at current levels before the report, at least for a partial position.And now for those that like a nice long term chart we can see CRM has formed an Inverse Head and Shoulders Pattern that is likely to serve as a continuation pattern, and a break above $165 measures to a $235 target within the next two years, or around a 60% gain.

Oasis Petroleum (OAS) – Hot Options Trading Last Hour, Takeover in the Works?

I wanted to highlight some hot action in Oasis Petro (OAS) seen in the last hour today that I noted on twitter well before anyone else saw what was taking place and shares are bid at $30 after hours continuing the late day strength.  I have zero insider knowledge and am just speculating because today’s options activity and volatility movement reminds me of various cases where I have picked up on unusual action and was able to catch a huge quick gain on a merger/takeover.  I have been "lucky" enough to own a lot of stocks via equity or call options over the past two years that were acquired.  Last week AuthenTech (AUTH) received an $8/share takeover offer just 3 days after I highlighted unusual options activity and bought a bunch of shares around $5.20.So, on to the action seen today and an overview of Oasis Petroleum and why it may be an attractive takeover target:Oasis Petroleum (OAS) saw wild options trading in the last hour of the session on Friday, and finished the day trading 8,861 calls, or roughly 25X daily average.  Even more impressive was the surge in Implied Volatility with IV30 jumping to 64.2%, climbing more than 50% on the day, and this type of late Friday options activity and IV surge reminds we of a few occurrences in the past three years that took place before a weekend takeover announcement, one that comes to memory is Massey Energy (MEE) which I spotted late on a Friday and highlighted on Twitter allowing many to cash in on the deal.The hot action in Oasis Petro today really started at 3:03pm when a sweep of 850 August $35 calls was bought at the $0.15 offer.  Considering shares were trading $28.91 and these options expire in a week it was unusual, and then the action picked up considerably with traders paying $0.20, $0.25 and $0.30 offers and a total of 4,091 of those calls traded.   Oasis shares would need to make a 21% move by next Friday for these calls to be in the money.  Action also came into August $30 calls for 1,912 contracts, September $35 calls for 834 contracts, and November $35 calls for 1,170 contracts.  By the close the August $35 calls were trading at $0.70, already a significant percentage gain in just an hour.August IV finished the day at 101.5% compared to September at 64.2% and November at 52.77%, and front month volatility more than doubled from 3pm to the close with IV Skew showing the strong demand for OTM calls.The action came with just 1 event seen for next week, Oasis set to present at EnerCom on Monday at 5:10pm.  Oasis also has an August 28th presentation at the Morgan Stanley Houston Energy Summit, but that comes after August expiration.Oasis Petro is a $2.77B Oil & Gas exploration Co. that recently blew away Analyst estimates posting $0.82 EPS vs. $0.32 expected, and also beat on revenues with an impressive 122% year/year growth.  At this market cap and that kind of growth rate it is clearly a name that should be considered a takeover target.   Oasis is a big play on the hot Bakken Shale area and could see a significant premium in a takeover, likely a deal approaching $40/share.On 8-8-12 Wunderlich reiterated a Buy rating and lowered its target to $40, noting that Oasis is executing well and growing production while also reducing drilling and operating costs.  Deutsche Bank has a $37 target and UBS has a $35 target.On the chart Oasis shares put in a key double bottom at the $22.40 level, also being the 61.8% Fibonacci of its all-time range, and a double top exists up at $35, while $31 as the 23.6% Fibonacci is the next level of resistance after putting in a powerful weekly candle this week.