Skip to main content

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.

Comments

Popular posts from this blog

FED Rate Hikes Could Cause Unintended Volatility Shock

Last week the Federal Open Market Committee surprised no one when they raised rates 0.25 basis points to increase rates to between 1% and 1.25%.  What did surprise the market, was the revelation that the FED is committed to normalize rates, even if inflation does not meet their target.  This was reiterated this week in a speech by William Dudley, President of the Federal Reserve Bank of New York, who stated he feels the FED needs to raise rates, despite low inflation, to be ready to act if the economy does slow down.
The market has been quick to respond, and nothing was hit harder by a reduction in inflation expectations than commodities.  Gold, since the announcement, is lower by 2.39%, and oil is down -3.18%.  Crude futures have broken their upward trend line and appear poised to test the previous low of $39.56.
While, oil has been under pressure all year, the S&P 500 does not seem to care, as it continues to make all-time highs.  Oil is down 23% year to date, while the S&P…

Gold and Treasuries Say “RISK OFF”, But VIX Says "RISK ON"

Today we are seeing a modest rebound in the market after yesterday’s small selloff.  Volatility remains extremely low, with the VIX hovering around 10.  It’s important for traders to recognize how low the VIX has been lately.  Since 2010, the VIX has only closed below 10 five times, and each of those five times has come in the last month.                   However, the market is not without risks right now.  Gold has rallied 6.5% since May 9th.  Treasuries have rallied, pushing rates to below 2.15.  So, the market is currently in a risk off mode while equities are in a period of historically low risk.  The VVIX (the VIX of the VIX), for its part, is not sounding the all clear signal, 87 is in the medium range for VIX volatility.  Tomorrow we have a potential market moving event with James Comey’s testimony to Congress.  The last time Comey’s name was in the news, we saw the VIX move from 10.5 to over 15 in one trading day (a 50% increase) on a day where the market was down over 2%.  …

Markets Soft without Stimulus

Markets around the world pulled back the reigns as central banks look to taper quantitative easing. Japan’s central bank decided to leave their current pace of monetary policy unchecked, which has effectively cut the Nikkei down 1.5% on the day, affecting nearly every market in-between, scaring the DJIA 165 points off the start this morning. US Treasuries have now notched the highest yield in 14 months on the 10 year note.

This morning 55,257 EEM July 35 puts were purchased by a trader for $0.29 each, costing him a large $1,602,453. This is a bearish move on the Emerging Markets ETF, with expectations that by the July expiration, the price of EEM will dip below $34.71. EEM opened today at $39.32 and if this trader was to pass the breakeven point, the ETF would have to drop by more than 11.7% within a little over a month.

EEM opened today 1.9% lower than its closing price yesterday and since the 52-week high the ETF experienced in early January, it has lowered by over 13%. While this …