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Unusual Options Activity


Yesterday's biggest options trades again involved the financial sector as we saw traders continue to buy Bank of America call options. The BAC Nov. 10 Calls traded 58,000 in a trade above the ask for $0.33, and at the same time 52,772 BAC Nov. 9 calls traded above the ask at $0.77. This trade profits if Bank of America is above 10.06 at November expiration, which is a 8.2% move from yesterday's close.

Another large option trade involved the XLF yesterday: a trader sold 50,000 December 17 calls for $0.27 and also sold 25,000 December 16 puts for $0.61. This is a 2-by-1 short strangle and  profits when the stock remains range bound and implied volatility drops.  We suspect twice as many calls we sold as puts in order to flatten the trade's delta so that the position is a purer play on implied volatility dropping. This type of trade makes sense for someone who is long calls in a financial stock like BAC or JPM and wants to hedge themselves in the event those stocks do not move from current levels.
Outside of the financial sector we saw unusual options activity in the mining sector. One of the largest trades was the purchase of 61,000 PAAS (Pan-American Silver Corp.) Jan. 2014 50 Calls for $0.60 with the stock at 20.85. The net premium paid in this transaction was $3.66 million, and is a bet that the stock will be above 50.60 in January 2014. This would require a 142% move in the stock over the next 486 days. The company's primary business is mining silver ore in North and South America, and this trade is likely a bet that silver prices will rise in the coming year and benefit PAAS.

UPDATE:

After looking further into the PAAS trade we noticed that 650,000 shares of stock were sold minutes after the option block trade. Selling the stock nearly flattens the positions delta and makes this trade more of a long volatility play than a bullish bet on the stock. The net position is similar to a long out of the money straddle; at expiration the position profits if PAAS is below 15.06 or 54.26. However, being a synthetic long straddle, this position will profit in the short term if implied volatility continues to increase in PAAS.

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