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 http://www.optionshawk.com/cms.php?page_name=Highlights

 

 

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: http://www.optionshawk.com/cms.php?page_name=Market_Recap_Reports

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….

Salesforce.com (CRM) is Not Rich on Valuation – Shorting It is Dangerous

Similar to the same types that like to say Amazon.com (AMZN) is rich on valuation, the same is said about Salesforce.com (CRM), and usually the same indicator is used to form this opinion, the P/E ratio.Salesforce.com (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 Salesforce.com (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. 

Nexen (NXY) – Option Traders Score Big on $15B Takeover

Nexen (NXY) shares are trading at $26.55 this morning, up a 55% jump from Friday as China’s CNOOC (CEO) Announced a $27.50/Share $15.1B Deal for shares.The deal comes following a surge in unusually bullish options trading in Nexen (NXY) since July 16th, and in large size, the type of trades that really lead one to believe this deal was in the works for a while and leaked.On July 16th a trader bought 10,500 September $17 calls and sold 10,500 September $16 puts in a $0.15 debit position, a bullish risk reversal.  At a deal price of $27.50 these spreads make a profit of $10,867,500.On July 17th the same spread traded another 10,000 contracts and was opening, adding to open interest the following day, and this time trading at a debit of $0.19.  These spreads will make $10,825,500 with a $27.50 deal price.Even more alarming is that on 7-20, the last trading day before the deal was announced, a trader bought 23,000 December $19 calls and sold 11,500 December $16 puts in a bullish risk reversal spread, one that will result in a profit of $18,917,500 when taking into account the net debit of $632,500 for the spread.I often catch unusually bullish options activity ahead of takeover deals, and it pays to follow the large sized options action, but this one seems a bit too large to be a coincidence and would be very surprised is there was not an investigation by the SEC.

Procter & Gamble (PG) – Option Traders See Rally Through 2012

I was hoping to get this piece out earlier this week after observing 10 days of relentless call buying for size in the PG January 2013 calls.  Shares jumped today by 3.75% on news that Pershing Square’s Bill Ackman is taking his "largest ever initial stake in a company" with P&G shares.OptionsHawk members were alerted of the call action for the past week and we bought stock at $61.50, while some others jumped into the LEAPs that were hot with the action.Based on the type of action I saw in the name, today may just be the beginning of a long run for PG shares, and after hours it is being reported that the Board is seeking to replace the CEO.  I am thinking that there will be plenty of catalysts through 2012 for P&G to create shareholder value, potentially via a break-up of its businesses or selling under-performing brands.The $175B Co. recently provided weak earnings guidance that took shares down to 1 year lows, and now trade 19.85X trailing earnings, 2.07X sales, 2.68X book, and 55.66X cash flow with a  3.53% dividend yield.  Based on these metrics shares are fairly priced and still a bit on the rich side, but new management could really boost shares.On the weekly chart shares recently held major trend support and continue a pattern of lower lows and higher highs, and the next potential upside target is right at $70, the 123.6% Fibonacci extension and would be an extension of the upper trend line.Now, to break down the recent options activity in P&G:The action really started on June 27th, which happens to have been the day shares bottomed, when 5,065 January 2013 $57.50 ITM calls were bought and 3,150 of the $60 calls.On June 28th action heated up with 5,400 Jan. 2013 $57.50 calls, 5,200 $60 calls, and just over 7,000 of the $67.50 and $70 calls.On June 29th the Jan. 2013 $65 calls were bought 11,860X and 5,150 of the $67.50 OTM calls.July 2nd saw 4,500 Jan. 2013 $65 calls, and 6,600 of the $67.50 and $70 calls.July 3rd and 5th were slower, but still some size buyers in the Jan. 2013 calls.July 6th saw 5,060 of the Jan. 2013 #62.50 calls, and 7,150 of the $65′s.July 7th Jan. 2013 calls with 4,400 $57.5, 3,900 $60, 4,780 $62.5′s, and 3,850 $65′s.July 8th with 11,230 Jan. 2013 $60 calls and 12,899 of the $65′s.In summary, looking at the Jan. 2013 Open Interest changes since June 27th 2012 we see:$57.50 Calls: Open Interest 2,732 to 17,340$60 Calls: Open Interest 9,933 to 29,483$62.50 Calls: Open Interest 9,572 to 21,548$65 Calls: Open Interest 21,743 to 53,203$67.50 Calls: Open Interest 13,762 to 29,288$70 Calls: Open Interest 22,026 to 37,107Overall, in 10 trading days the Jan. 2013 PG calls saw more than 105,000 calls added to Open Interest, and the action was buy side on the offer each and every day.PG’s IV30 at 18.5% is still fairly low for a stock that could be seeing a lot of changes in 2012, and based on this action I feel shares can make a run at $70 this year.

Forget Direction! Trading Consolidation via Long Volatility Strategies

One of the many advantages of trading options is that you do not need to pick a direction to have a winning trade, you can use indicators and statistics to set up high probability strategies that are Delta Neutral.Each week in the Options Hunter Newsletter I put out on Sundays, one of the 7 trades is always a volatility trade, named "Volatility Stalker".  Each of the last two weeks I have highlighted former momentum names that were trading in tight ranges, and odds were there would be an upcoming breakout or breakdown.  Both trades worked perfectly and the $75/month for the newsletter is an absolute bargain considering I put in about 20 hours of work into the newsletter per month, so basically paid $4/hour.I will screen-print each of the trades below to end this blog, but wanted to first discuss what I look for to find these trades.  A few critera to finding candidates for a long volatility strategy (keeping simple via long straddles and strangles):

  • Liquid Options – My Main Watch-list is 510 Stocks that Trade 1,500+ Options Per Day, and for this prefer ones that trade 5,000+ per day
  • >$50 Stock Price and Average Volume > 500,000 (This Alone Leaves 308 Stocks)
  • Short Float > 10% – Tend to See Stronger Breakouts/Breakdowns
  • Battleground Stocks – Stocks with Skeptics Whether it Be Due to High Valuation Metrics or Other Reasons
  • RSI (14) Between 30 and 60 – Do Not Want Oversold/Overbought Stocks – Want Consolidating Stocks
  • ATR and Bollinger Band Width – Both Can Be Charted on Stockcharts.com – Look for Stocks Near 6 Month Lows on these Indicators
  • Browsing Charts – Simple "Eye-Test" Looking for Stocks Trapped in Tight Ranges Between Key Levels
  • IV30 Near 6 Month Low – Looking to be a Net Buyer of Options, Look for Cheap IV30 Relative to 6 Month Range, or 1 Year Range
  • Catalyst – Upcoming Events are Always + for Volatile Moves, Although Generally Priced In When Announced, so Need to Act Fast
There are a few other relationships to look at with IV vs. HV, Skew, and Available Strikes, but the above should be a great starting point for anyone looking to make one of these trades.
The two trades below are from the last two weeks newsletters, the Chipotle (CMG) trade gained 65% in 3 Days and the Netflix (NFLX) trade gained 65% in 3 Days.  As non-directional trades, there is relatively less risk with the trade if you set up a max-length of holding to avoid decay, so this type  of gain in 3 days for a volatility trade is a strong win.
A couple names that currently fit much of the above criteria are Salesforce.com (CRM), Linked-In (LNKD), Wynn Resorts (WYNN), Buffalo Wild Wings (BWLD), and F-5 (FFIV).
As a trade-idea take a look at Wynn Resorts (WYNN) with shares in this $97.5/4105 range for weeks now and sitting near major support of its 200 week EMA, also forming a bear flag on the weekly with the next Fibonacci support at $87.40.  A rebound move could see shares reach the $115/$120 area.  WYNN trades 21.5X trailing earnings, PEG 1.34, and 39.4X cash flow, still over-valued but nowhere near as rich as shares were earlier this year, concerns lie with the slowdown in Macau revenues recently confirmed by the data.  UBS has a $165 target on shares, reiterated Buy on 5-8-12, so the Street sees value.  WYNN has not confirmed its next earnings date, but looking at the IV of the options it likely falls in August.
WYNN trades more than 15,000 options per day, and RSI currently at 46.7, fitting most of the criteria, except it only has 5% of its float short, but a large float.  WYNN’s IV30 at 37.6% is in the 14th percentile of the 1 year range, and near the lowest in a month with a 35% to 48% range.
The key here is WYNN’s Bollinger Band Width is at a 1 year low, and ATR also near a 1 year low.
WYNN currently trades at $101.82 and the August $105/$100 Strangle Trades at $8.25, a Profit Zone with Shares Below $91.75 or Above $113.25, a move that looks achievable when looking at the chart, and IV also should be bid up into earnings.  WYNN also trades weekly options, and experienced traders can sell weekly strangles against the long strangle to lessen the net outlay, and keeping a close eye on the official earnings date release.
*** This is not a trade recommendation, do you own due diligence.  It is presented for educational purposes as an example of how to utilize long volatility strategies in consolidating stocks.

First Solar: Reviewing the Hot Options Action as Stock Surges

The smart money has much better information access and you and I can do all of the technical and fundamental analysis in the World, but still not have the advanced trading tools that the Institutions have, and they are the ones moving the market.  Instead of doing all the hard work, you can follow the big $ trades, and let them do the work for you, which is the beauty of using options flow to generate trade ideas that fit your risk/reward profile.

An example was seen today with:

First Solar (FSLR) traded 58,900 calls and 70,600 puts on the day, 3X daily calls and 3.5X daily puts.  The June $13 calls traded 12,866 on the day and the $15′s traded 11,058.

Every day I follow options flow to pick up on where the smart $ is playing that day and FSLR was the clear candidate this morning as I noticed 2,500 June $13 calls bought at $0.45 and the resultant jump in the front month volatility although only 3 days from expiration (the combination of flow and rising IV is key).  By the end of the day FSLR June IV closed at 124.85%, jumping 30% on the day and now well above July at 91.88% with no expected catalysts this week.  Shortly after the call buy highlighted in the chat the volume began to pour into these contracts and it aligned perfectly as FSLR broke out past a 4 month downtrend over $13 (chart below).

As of 5-18-12 FSLR options began a more bullish turn with the IV Skew, and the relationship between OTM puts and OTM calls sank to the lowest ratio since October 2008.

FSLR has been a terrible performer, down more than 90% over the course of a year, so when there is sizable (Institutional) flow into bullish options, the contrarian move is a dynamic signal.  FSLR’s market cap is now down to $1.3B and trades 0.48X sales, 0.4X book and 1.95X cash and Debt/Equity at 0.25.  Also, more than 40% of the float is short, which can create a powerful move on breakouts with fresh buyers and shorts also covering as shares move higher.  David Einhorn covered his FSLR short in January.

There was also an article on Reuters at 8:57am that noted FSLR is ramping up production at its German plants to meet an unexpected demand before plants are closed at the end of 2012, a news story that saw limited coverage, and gave further confidence that the move could extend once the Street caught onto the positive news.  On 6-11-12 FSLR landed two Australian projects, so two positive news events in a name that is at a bearish extreme in sentiment and nearing cash value.

By no way would I take a long term positive view on FSLR, and not even a name I would hold an overnight position in, but these highly shorted beaten down names will offer tradable intraday moves.

By the end of the session the calls had gained more than 400%, and these are the type of intraday home-runs to look for especially in a market that has turned into a much tougher swing environment.  By following the options flow you can catch explosive trades while defining your risk.

The intraday chart courtesy of LiveVol (http://www.livevol.com/)

The 4 month daily on FSLR with the clear trend breakout (massive volume):