Yesterday we saw unusual call option activity in Anadarko Petroleum, an independent oil and gas company. The biggest trade of the day was the purchase of 2750 Nov. 80 calls for $0.37 with the stock trading at 69.10. This is a bullish bet that APC will be above 80.37 at Nov. expiration, which will require a 16% move in the next 35 days. Approximately 50% of Anadarko's revenue is derived from their natural gas business, which means the stock is likely to rally along with natural gas. Currently the stock is consolidating at support in the 68-69 area, and this trader believes a breakout will take it above 80. We see Anadarko as a hedged play on natural gas; since its business is split 50-50 between oil and gas, its stock will have less volatility than the price of natural gas but will certainly benefit from a rally. If Anadarko breaks out above 80, the next major resistance level is its 52-week high of 88, which means this call option could potentially return a lot but at just $0.37 it does not require taking much risk.
The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower. (Source: Access Hollywood) Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007). So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. A...
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