Options Radar

@SellPuts - The facts regarding our dispute

2011-02-07T17:32:00.000-08:00

Updated 2/09/2011

*** I have removed personal shots, as this was not my intention, my intention was to outline the facts of the situation. I will also clear some of the air about the situation by saying that @SellPuts did not know that the information he was passing along was mine, as it was being sent to him via an AIM Blast Group, so although he was not stealing from me directly, he was a middle-man. As I told him personally, I still feel that he is in the wrong for trying to run a paid service where he passes along info that is not his, and has no idea where it is coming from or if it is accurate, so I will say that his actions were more sloppy than malicious.

My handling of the situation was not professional and was a spontaneous reaction brought about by frustration of having my content stolen many times in the past. I still feel I had reason to confront him, but should have went to him directly, and that was a mistake on my part.

I'm not one to hold grudges and would like to put this situation behind us, because in the end it's not worth fighting over. We both made mistakes in this situation, and hopefully everyone can see both sides of the story now, and be understanding. I had the right to be upset, but I was brash and let my emotions get the best of me (this happens after your 5th concussion...in my case)***

Original Post (Edited)

I really do not care to get into the details, but my post here is for one reason, to call him out for running a paid service (@The_Buro) where he charges money to post other peoples hard work put into market analysis and information.

If you are paying for @The_Buro you are wasting your money. Yes, you may save a few $ on a monthly fee, but the time lag by which you receive the information is costing you much more, as his stale info is well behind the pack, and you could make enough money in a single trade to account for the difference in monthly costs.

I have confirmation he is stealing my information (not directly, but passing it along via his service), and will take measures to prevent the leaks coming from my paid subscribers, which is difficult, but my big problem is he is charging money for market analysis that is stolen.

I know for a fact that he is just copy/pasting information because he does not even correct my spelling mistakes, or sometimes I write "call" instead of "put" and he just posts the wrong info without following up, leaving his followers in the dark.

All of the market analysis I provide in my chat room is original, I type everything by hand in my own words and do my own research into every trade, etc.

This is blatant plagiarism, and below I will show examples that shows without a doubt that he is a fraud, and is charging money for other people's work. Luckily a few of my clients alerted me and provided me the info.

Below I will lay out screenshots with time stamps and compare what was said in my chat room (Trading Hub) and what was relayed through @TheBuro 's private twitter stream. I will just post a few from today and 2-3, but have examples from every day the past few weeks, but I doubt more evidence is needed. T

I really hate the fact that everyone is taking short cuts these days and no one does his/her own work. It's even more pathetic to then charge people money for other's work while you are pretending to be the one providing the insight.

People have no respect anymore...everyone just looking to make a quick buck....

Thinking Outside the Box when Monitoring Options Action

2011-01-13T13:38:00.000-08:00

Heading into Intel (INTC) earnings tonight all I could hear was bearish banter about the massive number of put options trading in Intel today, 323,614 to be exact, or 8X average. However, as I laid it out to my clients, most of the action looked to be hedging, Intel options are cheap and it is an under-performing name at historically low valuation. I just could not see that the 50,000 February $20 puts were being bought as straight bearish bets, requiring shares to fall more than 5% and be valued like a Bank.

I was not interested in trading Intel, because, frankly, it's boring and I did not see a big edge in applying an options strategy.

I was much more optimistic due to the events in the options market leading up to the Intel numbers.

1) I noted last week and this week the massive January $14 call buying in Applied Materials (AMAT)with more than 56,000 now in open interest, obviously a derivative play on Intel, and was actually a recommended purchase by Goldman's options team

2) The buyer of 100,000 OTM calls in Tech (XLK) yesterday that stuck out like a sore thumb, a play on not only Intel, but IBM and Apple next week.

3) The action that really set the tone was today around 10 Semiconductor names saw unusually bullish options buying, upside bets, and Intel is sure to move the group even though it is an "older" chip name.

A few examples include:

Cypress Semi (CY) massive buying in February $22 and $23 calls. I actually noted the big January call buying in this name early this week, which have since tripled in value.

KLA Tencor (KLAC) saw insane action with a block of 6,500 January $40 calls bought and the $39 and $41's also saw action, even the $50's oddly active.

Those two really stuck out but the same can be said for IDTI, MIPS, PMCS, and PWER.

It pays to think outside the box because the big money is not made in Intel. KLAC is up 5% after hours and AMAT is up 4.65%!

Intermune: Option Traders Get it Right this Time

2010-12-17T04:17:00.000-08:00

Intermune shares were torched in May and fell from $42.50 to $10 as the FDA surprisingly did not approve it's lung disease (IPF) drug pirfenidone (Esbriet).

This morning the CHMP of the European Medicines Agenecy adopted a positive opinion and with shares closing yesterday at $14.27, shares are now indicated to open above $30, more than a 100% move!

For a few weeks now option traders have been placing large bullish bets in January and April, far out of the money call buying in size. Looking at open interest you can see there are 10,447 contracts in January $20 calls, 16,743 in January $22.50 calls, and 30,262 in January $30 calls. In April there are 11,802 in the $15 calls, 12,388 in the $20 calls and 11,619 in the $30 calls.

A few recent large trades include:

November 5: Trader Buys 3,900 April 20/30 Call Spreads for $2.20

November 22: Trader Buys 10,000 April $15 Calls at $4.25

November 30: Trader Buys 4,400 January $22.50 Calls at 15 Cents (Going to be Worth $8+ Today)

December 10: Trader Buys 2,300 January $20 Calls at $0.40

I would expect to see profit taking today so as not to be blindsided if the final decision does to align with the recommendation received this morning.

I've written a few stories on ITMN in recent weeks after seeing institutional sized bullish trades, and here is the most recent one:

December 2, 2010: Option Traders Seeking European Approval for Intermune, Boom or Bust

"InterMune (ITMN) sees a bullish 3 way trade in April as 2,500 $6 puts are sold at $0.90 and 2,500 April $17.50/$25 call spreads are bought at $1.70, net debit of $0.80. Shares have found $12.50 as support and there has been a lot of positioning in OTM January calls the past few weeks, shares pummeled from the $45 mark after the FDA voted against its key drug. January IV skew has a bullish bias and the IV is at 73.5% while April is at 153.7% as the date for potential European approval is not yet known. Pirfenidone is the drug in question and faces European review in Q1 of next year. It is all or nothing here as the Company sold its only other viable pipeline drug to Roche. The FDA Panel in the US recommended approval, sending shares to $48, and then a surprise denial sent shares under $10. Shares would likely move back into the $20's on approval in Europe."

SanDisk (SNDK): Flipping Friday Options

2010-12-11T15:59:00.001-08:00

The StockTwits Stream was actively talking/trading SanDisk on Friday, and I was also all over this name for my subscribers in our daily chat room.

My first post was 10:07am:

SanDisk (SNDK) climbing against the market fall and Dec. 50 calls trading 2,997, with 65% offer side bullish buying, shares near a breakout of this consolidation flag

A few seconds later I Posted: SNDK looks like explosive potential here, trying some Dec 50's at 52 cents

At 10:10am I posted a more complete story:

SanDisk (SNDK) climbing against the market fall and Dec. 50 calls trading 2,997, with 65% offer side bullish buying, shares near a breakout of this consolidation flag that would target the $50 area from June highs, and the fundamental story is improving based on recent pricing reports, also often featured in takeover chatter. The memory chip name remains very cheap on strict valuation basis at 12.5X earnings, 0.69 PEG, and 8X cash flow, with RW Baird raising to Outperform with a $55 target on 11-22. Also, a power outage is threatening Toshiba chip shipments.

At 10:27am, just 20 minuted after entering the calls I posted:

SNDK: Close Calls $0.98 (Quick 80%+ Move) - Great Chart, but Why not Take it, not greedy

The calls eventually got as high as $1.25 I believe, but this was just a Friday trade and there was no point risking this one as a longer term holding. You can't play the woulda, coulda, shoulda game if you have 88.5% profits in a 20 minute trade.

We caught the move very early, capitalized, and got out, as any successful options swing trader should, and the fact that it was a Friday was even a better reason to exit and not hold over the weekend when anything can happen to cause a weak market open on a Monday.

Now, if SanDisk happens to get bought out this weekend, I will be pissed for about a minute, but hey, that's trading.

Amarin (AMRN) - Biotech Lotto Tickets in Calls Take Two

2010-11-29T06:25:00.000-08:00

First it was Exelixis (EXEL) (See Post Last Week) and now Amarin (AMRN).

Amarin (AMRN) shares are up 52% to $5.40 Pre Market on Positive Trial results, basically making a big splash and making it an immediate takeover target.

In a note to clients on 11/24 I wrote:

"Amarin Corp (AMRN) is an interesting case as a suspicious block of 1,000 December $5 calls is bought for $0.25 with shares at $3.60, a Biotech that is expected to report phase 3 MARINE trial data before year end, the date recently pushed up. Call volume is 10X average, but there is more than 2,000 in open interest yet. December IV of 182% compares to January at 165.3% so the data is expected to be a mover. AMR101 is for reducing elevated triglyceride levels. Results from MARINE expected by end of 2010 while ANCHOR studies will be completed by end of 2010 and reported early 2011. The $345M Biotech is targeting a multi-billion dollar market potential. On November 11th Canaccord put a $7 target on shares, a double from here. Amarin also is in discussions with potential partners."

Trading Strategy: This is one of those lottery ticket gambles like we saw in EXEL that worked out, but don't risk what you wouldn't mind losing.

Early indications are for those calls to be big gainers...He Strikes Again!

Dollar Tree (DLTR) -Looking Back at a Big Bull Trade

2010-11-19T14:41:00.001-08:00

My friend over at Bloomberg just reminded me of a story I had on August 9th via Bloomberg on Dollar Tree (DLTR):

By Jeff Kearns
Aug. 9 (Bloomberg) -- Dollar Tree Inc. options trading
jumped to 10 times the four-week average, with most of the
volume concentrated in a bet that the retailer will extend this
year’s 34 percent surge and reach a record by November.
An investor bought 5,000 November $45 calls while selling
the same number of November $40 puts, according to Joe Kunkle,
founder of OptionsHawk.com, a Boston-based provider of options
market data and analytics. A total of 11,088 contracts on the
company changed hands as of 3:03 p.m. New York time.
The strategy, known as a bullish risk reversal, profits if
the shares exceed the higher strike price by expiration. The
stock, which has never closed above $45, snapped a five-day
losing streak by climbing 2.6 percent to $43.13.

My actual note to clients that day was:

Dollar Tree (DLTR) shares are rebounding 2.55% today after 5 consecutive down days after August put buying was noted. Perhaps the optimism is on strong McDonald's sales that shows consumers are still trading down, a good thing for a dollar store. Dollar Tree will announce earnings on August 19th and a trader put on a large, 5,000 contract, November $45/$40 bull risk reversal for a $0.30 debit today. Options volume is 8X average due to the trade and the trade is looking for an upside move in shares beyond recent $45 highs. Shares trade 12.55X earnings, 0.99X sales, and 13.85X cash flow, a very cheap retailer. Strong results were already reported at 99 Cent Stores (NDN) and Family Dollar (FDO). IBD and Barron's were both out positive on shares in late July, while Goldman was cautious in early July.

Looking at where Dollar Tree closed today that $0.30 debit on 5,000 contracts, a $150,000 investment, closed today to mark at $8.40, a 2700% gain, or a $4,050,000 gain!

Once again...it pays to follow the smart money, and in this case shares trended higher for months, never really looking back, but it did require the patience to hold steady in the position, although the trader could have taken more gains on the initial earnings surge.

Exelixis (EXEL): Unusual Options Action - When Lottery Tickets Make Sense

2010-11-18T04:47:00.000-08:00

Exelixis (EXEL) shares are up 21% this morning to $5.75 after positive prostate cancer results from XL184.

On November 16th, Tuesday, I had the following note out to clients:

"Exelixis (EXEL), the Biotech with a cup and handle pattern, with 2,575 November $5 calls bought vs OI of 2,425, traders paying $0.15 offer with shares at $4.40 and calls expiring in 3 days. The Company will present data from XL184 on Thursday, November 18th at 7:30am, and will also host an Investor Day on December 2nd. Shares trade 2.95X cash value, and the update to its prostate cancer drug is expected to move shares, November IV at 180.8% versus December at 92.44%. The measured move on a break of $4.80 would be North of $6.80, so the calls are lottery tickets, but could pay off nicely."

These calls are likely to be up at least 400% on the open! The cup and handle chart was a sweet set-up as well (Chart I Posted from 11-15 in Chat Below)

Armstrong Industries (AWI): Case Study: It's Not the Size...It's How Unusual...

2010-11-05T14:41:00.000-07:00

A quick Friday post regarding Armstrong Industries (AWI)which closed 9% higher on earnings, wit was as high as 18% up intraday.

I had a note out to subscribers on October 29th regarding Armstrong, as follow:

"Armstrong Worldwide (AWI) trading 1,366 calls, 15X average with IV jumping 6%, November $45 calls with 1,000 trading with earnings on 11-5. Shares have consolidated tightly between the $40 and $43 levels. The $2.37B maker of flooring and ceiling materials trades 0.85X sales, 14.4X cash flow and 1.25X book. Armstrong raised its FY10 view back in August."

This was a case where the action was not huge by any means, but it stuck out as being unusual, 15X daily average volume in out of the money calls with earnings in a week. The calls were bought at $0.55 to $0.60 and closed the day marking $5.25, around a 750% gain over the course of a week.

I see these often and it pays to notice not just the massive action in the heavily traded names, but pay closer attention to where the action is very odd and basically makes no sense, as they often result in the best finds. In this case the valuation looked good and the chart set up for a big move with the recent constricted trading, so it looked to have the potential to explode, and it did.

On that same story put out to subscribers I also mentioned unusual call buying in Arrow Electronics (ARW) December $32.50 calls, and Arrow has been climbing steadily as well.

Schlumberger (SLB): A Lesson in Patience

2010-11-04T16:10:00.000-07:00

As many of you likely know by this point I like to track unusual options activity and then assess if the large money bets align with my fundamental and technical views of the stock in order to emulate the trade.

I wanted to go over an interesting case with Schlumberger (SLB), a trade I followed.

Way back on April 21st, I put a focus story out to clients with the following Analysis:

"Schlumberger (SLB) with a bullish 3 legged trade as 5,000 November $55 puts are sold at $2.16 and the November $70/$80 ratio call spread is bought at $1.25 for 5,000X10,000 contracts, a net credit, and very bullish trade with shares at $67.80. The trader keeps the credit as long as shares stay above $55 come November, and offers significant upside, although limited to a move to around $90.75 on the upside before the trade begins to lose money. Shares recently tested the 200 day EMA twice and held and are now breaking into the clear with $72 the next target. After that there is plenty of room for a move to $80. The oil services giant trades 17.6X earnings and 4.25X book value."

At the time of this shares were trading around $67.50, and a trade with this complex structure is extremely bullish due to the potential of being put 500,000 shares of Schlumberger at $55/share. A trader was willing to put a lot on the line, and had a longer term bullish view of this Company, so I figured he/she likely has access to better information and has put in the time to design this trade.

And now, for the lesson in patience:

This trade had to withstand the BP oil spill that cause oil services names to sell off sharply, Schlumberger touching lows of $51.48 back on June 1st, and this trade required a ton of margin with the leveraged bet. For awhile it was looking like we would be taking delivery of a bunch of Schlumberger shares.

However, flashing forward to today, shares closed at $75.80 and the spread is currently pricing around $5.20, not bad for a trade that already paid a credit of $0.91.

Sometimes, no matter how crazy the market gets, you have to believe in your original thesis and ride out some of the chop to eventually hit the jackpot, a very important lesson in trading, and the same can be said in life.... stick to your beliefs, take some chances, and do not let the noise deter you, and things will work out just fine.

Risk Reversals, Synthetics, Covered Reversals, Ratio Spreads, and Various Other Option Strategies can Yield Huge Returns, but obviously come with the added risks, but if you truly believe in a stock you can cash secure the naked part of the options strategy, and be willing to acquire shares at a cheaper price down the road anyhow....

1 Year Schlumberger Chart Below

Research in Motion (RIMM): Explosive Options Action Continues

2010-10-26T17:24:00.000-07:00

Shares of Research in Motion (RIMM) climbed nearly 15% from Monday (10/25) lows to Tuesday (10/26) highs, and option traders were taking large bullish positions right from the beginning of the move, and continued to build bullish bets right off the opening bell today.

On Monday shares of Research in Motion broke early morning highs around 2:20pm, and volume began to really pick up just after 3pm, shares then climbed from $50.50 to close near $54. A member of my premium product noticed the move early and provided the alert to members in the chat room, and I reached out to my contacts and discovered that RIMM was unveiling it's "Playbook" tablet at an Adobe (ADBE) Conference. We saw the move, and knew the catalyst well before any news services picked up on the activity.

The options activity gave further confidence that this move was for real, and there was a lot of upside potential.

On an average day RIMM trades 50,000 calls and 40,000 puts, one of the more active names in options. On Monday, RIMM traded 105,000 calls and 50,000 puts, but even more impressive was the movement in the implied volatility, and the skew structure as far out of the money calls at the $55, $57.50 and $60 calls saw traders aggressively paying the offer to take part in this move, and implied volatility is RIMM jumped 28% on the day, a kind of move generally only seen ahead of a takeover or other major catalyst to send shares higher.

The largest trade on Monday came early in the move , a buyer of 6,200 November $52.50 calls at the $1.15 offer on the ISE (trading at $3.60 currently, more than a $1.5 million gain in 1 day). This large trade was the signal to get involved, and I prefer the further OTM calls when you know IV is about to be pushed higher, because the gains are for a larger percentage, as the cheap calls gain on both the move higher in the stock price, and the volatility being bid higher with speculators. My choice was the November $55 calls at $0.85 (Reached $3.45 today as RIMM shares touched the 200 day EMA, a 300% Gain).

On Tuesday the action continued, as 219,759 calls and 107,443 puts traded, well above average daily volumes. The action started very early (Shares were also boosted on reports that India may give RIMM more time for a solution to a security issue.) with a block buyer of 10,000 Janaury 2012 $90 calls at the $0.95 offer (Posted Trade Live on Twitter to Followers), a trade that is looking for shares to gain around 75% over the next 1 year and 3 months. At 10:41am 2 blocks of 5,000 November $55 calls were bought, 1 block of 5,000 November $60 calls was bought, and 1 block of 5,000 November $50 calls was bought. Where the action was is even more surprising as 34,220 November $55 calls, 20,416 November $57.50 calls, 25,988 November $60 calls, and even 18,412 November $65 calls traded, noting that the $65 calls would require shares to gain another 20% within 3 weeks.

The Chart Below Illustrates the Timing of the Option Buys with the 2 Day RIMM Chart:

This is another clear example of how when options action combines with price action, and has a catalyst to justify the move along the the fundamentals and the technical analysis, explosive gains can be made in the matter of minutes, hours, or days when trading options.

My new scan I run every 10 minutes during the trading day for Hot Options Action, seeking out the volume trades along with volatility movements, is going to lead to many more of these opportunities going forward.

On a side note, looking at the longer term view of RIMM i would note that this was the perfect set-up, a falling wedge that broke out on volume at $50, similar to a chart I posted on Twitter regarding Visa (V) when it broke a falling wedge at $71.50 (now trading $80 less than 1 month later), a significant technical reversal move:

Shares of RIMM were beaten down and trade at 8.8X earnings, PEG of 0.79, and 10.8X free cash flow, a clear value at these levels and attractive as a takeover target, potentially for Microsoft or even Cisco. With the coming launch of a new product, even if it is not a real threat to the iPad, it is still a move in the right direction, continuing to innovate and not giving up the good fight with Apple.

Shares could pullback some after this most recent surge, but this was a complete trend shift, and I would target a move to $60 within the next 3 weeks.

If you are looking for a high reward/risk trade in RIMM the November $55/$60$/$65 Butterfly Call Spread Trades for $0.97, basically profitable between $56 and $64 for shares with max profits at $60. The trade can also benefit if rumors are squashed and IV comes back down. The trade view is below:

There are many great ways trade RIMM from here, but I figured this is one way with a nice P/L profile.

I felt it was necessary to give a view of how crazy the options trading in RIMM has been the past 2 days, and hopefully it provided some value.

One Quick Addition - A view of RIMM Implied Volatility since Sep. 1; IV 30 in Red, IV 60 in Yellow, and IV 180 in Orange with HV 30/60 in Light Blue/Dark Blue; Notice the Spike of IV 30 the last two days (Red)

Thanks

Joe

Baidu (BIDU), Amazon (AMZN), and Intuitive Surgical (ISRG) Earnings Trade Recaps

2010-10-22T13:37:00.000-07:00

Options are a wonderful tool come earnings season as you can define your risk...blah, blah, blah....but it is true and just wanted to recap 3 earnings trades in 3 high fliers this past week.

Amazon (AMZN): Jumped the Gun on this One and recommended the November 170/180/190 call butterfly spread at $0.95 back on October 13th, and got some help with GOOG earnings and an upgrade. I closed 1/2 at $1.55 ahead of earnings and the other 1/2 at $1.65 after earnings, although the spread expanded to $2 today and is likely heading higher, but not a bad gain to take, playing it safe with the market acting choppy.

The spread looked as follows:

Baidu (BIDU) was another one I was bullish and put on a diagonal spread the session ahead of earnings, using the new weekly options to my advantage where the volatility was insane. I sold the October $115 calls and bought the November $120 calls for a $1 net debit and closed the spread when shares touched $108.50 this morning at $1.80, a solid 80% 1 day gain.

Spread looked as follows:

Intuitive Surgical (ISRG) was a name I was bearish on, partly on valuation and common sense of less surgeries with less people employed and hence insured, and also I was seeing a ton of bear risk reversals trading the 2 days into results, risky strategies putting a lot on the line, so I felt good about shares heading lower. I chose to sell the $290/$300 November vertical call spread at $3.80 credit. As shares held $255 this morning I recommended buying back the spread at $0.50, mainly because I did not feel like holding onto it for another month to risk the great gains, even though there is a low probability that shares bounce back above $290. I took home most of the net credit, so it was not worth the stress to me, and the money is better off in a new trade.

Spread looked as follows:

Trading Options with Earnings is a Must to Gain an Edge and Create High Probability Trades, or at least great reward/risk ratios in the trades.

I combine the week of options action into the name (looking for institutional interest in trades leading up to earnings), technicals to develop the targeted move for shares, focusing on basic support and resistance, a look into the volatility skew and cheapness/expensiveness into earnings, and also the fundamentals, because I still believe in valuation.

I also love a stock with a high short float that is consolidation in tight Bollinger Bands, makes for some added excitement.

Have a Great Weekend!

Mosaic (MOS) Earnings: Why Knowing Options Action Can Help After the Fact

2010-10-05T15:49:00.000-07:00

Mosaic (MOS) reported earnings last night and shares fell around 3% at first and stayed in the red in extended hours, but the numbers looked fairly good, and the commentary was positive, so the price action did not align with my thoughts, and also with my earnings preview provided to subscribers earlier that day where the options activity has a bullish bias.

It was not a name I wanted to trade into earnings with an options strategy, but knowing that the sell-off was unlikely to persist, it made Mosaic an easy buy after hours.

Shares closed the regular session today up 3.4%, and touched $61.95 on the upside, after trading as low as $57 last night, a great move off the lows.

Anyhow, it is just an example of how you can follow the options action and do not necessarily need to trade ahead of results, but can trade any reaction to results that does not align with what the action was saying in the week leading up to results.

Here was my Mosaic (MOS) earnings preview to subscribers from intraday yesterday:

OPTIONS RADAR: Mosaic Options Fairly Quiet into Expected Strong Earnings Report

Ticker/Price: MOS ($58.69)

Analysis:

Mosaic (MOS) will report results after the close and 11,700 calls and 6,820 puts are trading as of 2pm, mixed action with no strong price bias on the overall spectrum, a slight negative volatility bias. The Implied Volatility skew looks extremely bullish with OTM calls being bid up in a big way. The largest trade of the day was a buyer of 2,400 January $75 calls with shares at $59. Another trader sold around 500 October $60 straddles. October IV of 52.76% compares to November of 42.86% and is +4.8% today. The largest share trade today was bought above the offer for 15,000 shares. Shares have rallied since the BHP/POT deal was announced, although have pulled back 8% or so the last few days into earnings. The agricultural chemical company trades 14.76X earnings, 3X book and 10.5X cash, also seen as a potential M&A target down the road. Mosaic was started a Positive at SIG with a $76 target on 9-23. China accounts for 20% of global potash demand, while India and Brazil are also big importers, so demand is seen as strong considering the recent strength in those economies, and pricing has improved for this group.

Mosaic (MOS) trades responsible for some of the open interest:

Aug-30: Buyer of 4,050 October $67.50 Calls at $1.21 Offer, More than 3,000 October $60 calls bought around $3.20

Sep-16: October $60 calls with 3,856 bought on the day

Sep 17: 500 Oct 65/55 Bull Reversals Trade

Sep 21: Sellers of 5,813 Oct. 67.50 Calls

Sep-22: More than 4,500 Nov. $55 Puts Sold Bid Side

Trading Strategy: There looks to be a bit of a bullish bias on shares with recent trades, but I am not looking to play earnings, although I would be a buyer on any weakness.

Hartford Financial (HIG): Anatomy of Rumor Trading in Options and a Suspect Trade

2010-09-10T15:15:00.000-07:00

For options traders it has become common knowledge that certain takeover rumors will see a mid-day spike once CNBC's Fast Money airs and one of the Najarian's from OptionMonster discuss takeover rumors and unusual options activity that gets the general public excited enough to jump in and push not only the stock price higher, but also the implied volatility of the call options, a double-win for anyone already invested in the calls.

This almost every day occurrence allows for "scalping" calls for quick gains, as the excitement usually dies down in less than 15 minutes and normal trading resumes.

My problem with this is that citing options activity as "unusual" when it has taken place after takeover chatter made its way around trading floors and news wires is making false claims, and is misleading. In my opinion, options activity is only unusual and worth noting if it takes place without any news, takeover chatter, or other known event driving the trades. Chasing takeover chatter with options happens every single trading day, and should not be seen as unusual, nor should you read all that much into the options volume, as most of these trades are quick in and out trades that make the volume looks massive, while the next day you will notice the open interest barely changed.

Another issue is that the pumping is selective, usually to names that they are already invested in, looking for a quick flip, whether for personal accounts, or for subscribers to products that get the heads up. Numerous occasions they decide to proclaim unusual trading in options for a name that is just seeing small lots of contracts trade, no institutional interest whatsoever. The options action worth noting is when the trade sizes are larger, the trades are hitting the offer, and the implied volatility is rocketing higher, bending the IV skew.

Hartford Financial (HIG) trading today, September 10th, was one of the most blatant attempts at a quick score I have ever seen with this everyday pump and dump scheme.

At 9:45am I received a takeover rumor that Hartford Financial is in talks with Allianz (AIZ) on a possible deal, with a price in the $30's being the rumored price. Shares abruptly jumped from $22.32 to $22.75 in just 6 minutes, and then topped out at around $22.95 around 11am. This is a fairly small move for a rumor stock, especially if there was much truth to it. Shares then faded back towards $22.50 by 12:30pm, and the IV faded from 52% way back down to 44% in the September contracts. I would note that the largest options trade before 12:30pm was a seller of 300 January $22.50 puts, and one lone buyer of 290 September $23 calls. Most of the action before 12:30pm was very small rumor chasing action, only 4 or 5 trades of 100 to 150 contracts in the September $23 calls, low $ value trades in the closest OTM calls.

As 12:30pm came around shares of HIG started to bottom and pick-up a bit as most traders spread the word that it would be the name receiving the Fast Money Halftime mention. And then, at 12:53pm the largest trade of the day by a mile hit, a buyer of 7,600 September $26 calls at $0.12, a $91,200 purchase of calls that are 15.3% out of the money and expire in 1 week.......Seriously..... Now, at 12:56pm Najarian mentioned the action in Hartford Financial as "unusual" on takeover chatter and noted that he had already bought calls in HIG. The volume in HIG exploded and shares jumped from $22.65 to $22.95 and as IV jumped as well, the price of the September $0.26 calls immediate doubled to around $0.25. These calls were not tied to any shares, and were a straight bullish bet, and insane bet unless you were almost guaranteed that shares would head higher. Obviously you purchase the far OTM calls because the leverage will cause a larger % move in the price of the calls as volatility pumps higher.

Shares of HIG closed the day around that $22.95 mark and the September $26 calls closed at a mark of $0.18, a 50% gain and a nominal gain of $45,600. Many of the calls were likely shed before the end of the day, potentially immediately on the spike, and the open interest change on Monday will tell the story as to how many calls are actually willing to hold steady waiting for a buyout to happen within a week's time.

I posted the daily HIG chart below for a timeframe of the events and the share movement throughout the day.

After the Fast Money pump the call volume in HIG really picked up and my guess is that a lot of people are stuck in these lotto tickets, not realizing these kind of rumor chases occur each and every day, and 7 times out of 10, if you are not out within 30 minutes, you are going to lose.

75,667 HIG calls traded today, around 15X average volume. Considering we had rumors earlier this week with XL Capital (XL) and Lincoln National (LNC) it seems like the chase is on with the insurers, and I sincerely doubt all three will be bought out by next Friday, which is the only chance a ton of call holders have after following the media coverage, not realizing the real "smart money" was already in these trades and are the ones selling to you.

The SEC is so far behind and is unlikely to do anything unless HIG actually is bought out, which I hope happens, so we can see some justice.

I am in no way claiming that any of the guys from OptionMonster made the trade as I think they are smarter than that, and doubt they are in desperate need of a quick score, but something is definitely wrong with having this every day occurrence the misleads the public. Having the CNBC audience get all giddy and jump into options positions on takeover chatter that almost never results in an imminent deal is a serious problem, as the general trading public is unaware of what really happens behind the scenes.

I May Have to Limit Tweets Due to Content Thiefs

2010-08-04T06:21:00.000-07:00

Without getting into too much detail OptionMonster recently hired Fahad Khalid to do a new "Behind the Trade" Feature Each Morning.

Fahad was a client of mine for two months where he was able to see what exactly I was doing and how I provided content to subscribers and has now been using the exact format for OptionMonster, who also decided to recently launch StockMonster, an idea I conceived and sent a Business Plan to more than a year ago. Also, the first day Fahad was a client I found him copying and pasting the exact info from my chat room onto his web page without citing me whatsoever, not a great history there.

A quick look at Fahad's "Work" this morning shows he decided to comment on Kohls (KSS), Ryalnd (RYL), ARM Holdings (ARMH), RackSpace (RAX), and Cree (CREE). Details at this Link

Interestingly, these were the 5 Options Action names I commented on yesterday to the public, well ahead of this piece being released.

Decide for yourself, but I do not think it is hard to see where he is getting his ideas from, and why OptionMonster decided to hire him.....

Kellogg's (K): A Prime Example of How Following Options Action Pays

2010-07-29T15:21:00.000-07:00

Kellogg (K) shares fell 6.87% today to $47.98, as low as $47.28 intraday, after posting a very weak earnings report and guidance. Without getting into the detail it was a major money maker.

As you can see, 9,314 August 50 puts traded today against open interest of 9,781, some closing positions, while someone was quick enough to buy 5,190 at 9:34am this morning on the ISE at $1.10. The contracts closed today around $2.30, more than 100% gain for that early put buyer this morning, and traded up above $2.50 at a point today.

However, the action this morning was not what gave this one away as put action jumped the last 2 days into earnings, with more than 6,400 trading yesterday, buyers at $0.55, including a block of 3,000 which now has gained $540,000 on the trade.

Even on Tuesday there was a buyer of 3,500 September $50 puts at $0.75 on the PHLX, those calls now trading at $2.90, a healthy $750,000 gain in 2 days.

However, traders were looking for a weak quarter way in advance. More than 2 weeks ago I put out the following note to clients, and much of my thesis for the bearish action came to fruition today. I recommended the August $50 puts at $0.70 that day, a solid 235% gain for two weeks in the puts:

"7/15 (Shares at $51.70)

Analysis:

Kellogg (K) is trading 3,900 puts, 6X average daily volume as IV jumps 10% with shares failing to climb back above its 200 day EMA for the past 6 trading sessions. A block of 1,500 August $50 puts were bought, and then some additional buying, also in September $50 puts, mainly offer side buying. Shares look to have topped out at 2008 highs making a double top, and could now retrace back below $50. The cereal maker trades 13.3X earnings, 1.56X sales, and 27.3X cash flow and could be hurt by the rising prices in oats and wheat, which are surging the past week. Kellogg will report earnings July 29th and CSFB says the Company is likely to lower guidance. Cantor started shares a Buy with a #$63 target on June 10th. The Company recently had a cereal recall that could impact upcoming earnings.

Trading Strategy: This is an ugly chart and the rationale makes sense, so the Aug. 50 Puts at $0.70 are worth bidding for."

As with any trading strategy it is not fool proof but when the stars align (the stars being technicals, options action, and fundamentals) you have a major edge in trading that brings big time profits.

YUM Brands Earnings Preview: Options, Technical, Fundamental Analysis

2010-07-13T05:30:00.001-07:00

YUM Brands (YUM) volatility and options volume jumped on Monday ahead of Q2 earnings on 7-13 after the close. More than 12,000 calls and 9,600 puts traded which is more than 3X daily average volume, and most of the activity was bearish. There was a late trade that saw a trader close 2,300 July $41 calls with shares at $40.60, not willing to hold into earnings. Much of the day the action was with buyers in July $40 puts that traded 6,919 contracts against OI of 1,656, including a block of 1,500 and a few other sizable buys, almost all the action paying the $0.95 offer on a 10 cent spread, aggressive bearish buying. On July 1st there were sellers of around 3,000 August $38 puts, the downside potential is likely limited, and it is a level traders are willing to get long.

The July IV of 65.74% compares to the August IV of 32%, a massive volatility spread into earnings, and the at the money straddle is pricing in a 5.5% move on earnings. The last 2 quarters the straddle has been underpriced, and being long the straddle has been the right approach as shares moved much more than expected, so this time the volatility is being pumped up early. The volatility skew structure is also showing a steep slope, a very bearish bias in the options.

YUM shares hit all time highs at $44 in late April and formed a bit of a double top in the June rally as $38.50 is support in a descending triangle. A break below $38.5 would likely test $36 support. The trends in MACD, RSI and Money Flow are also bearish, in major downtrends since late April and shares are bumping up against CCI trend resistance on the recent bounce. Shares also failed at the converging 20/50 EMAs yesterday.

A fundamental view sees shares trading 14.7X earnings, a PEG of 1.5, 1.75X sales, and a large debt/equity ratio of 3.14, a sign for caution with the quick ratio below 1. Shares look relatively expensive to fast food peers, especially Burger King (BKC) which is becoming a value buy.

Expectations for this quarter come in at $0.52 and Revenues of $2.26B. During 2010 the Company is planning on 1,400 stores in China, a push into International markets being a major theme. However, the US business remains under pressure from high unemployment, competition, and pricing wars with competition.

Analysts are mostly positive with UBS reiterating a Buy with a $49 target on June 29th and most tier 1 firms positive on the stock.

The options action and fundamentals show the potential for a pullback in shares, likely due to weakness in US sales, while the Technicals also line up for a move back to the $38.50 support level, which may break on the third test.

One potential earnings play would be the July $40/$38 1X2 Ratio Put Spread at $0.35 to Take Advantage of the Overpriced OTM Puts

Tractor Supply Co. (TSCO): Insiders Load Up on Calls into Guidance Boost?

2010-07-07T17:54:00.000-07:00

After the bell tonight Tractor Supply Co. (TSCO) reported great same store sales and also guided Q2 and FY10 well above Street estimates. Shares are indicated nearly 5% higher after hours to $66.88 after gaining 4.06% during the regular trading session.

As you can see, the open interest in the OTM July $65 calls, now going to be in the money, had open interest of 4,012 going into today after a few recent surges in call activity.

Average call volume for Tractor Supply Co is 439 a day, and the open interest in those July 65's is more than the combined open interest in all other strikes across the next 3 months of option strikes.

Yesterday, July 6th, more than 2,500 of the July $65 calls traded, offer side buying with traders paying anywhere from $0.75 to $1.25, aggressive offer side buys on fairly illiquid contracts with wide bid-ask spreads.

That action confirmed the action from June 30th when I put the following note out to clients:

"Tractor Supply Co (TSCO) with some unusual action early as 1,368 July $65 calls trade versus OI of 303, shares at $61.30 after filling a gap. Call volume is 5X average and the action was led with buyers at or near the offer on wide spreads. Shares are now oversold on the daily and have formed a bull flag on the weekly. The $2.2B market cap specialty retailer trades 14.5X earnings, 0.68X sales, and 16.65X cash flow with a 12% short float, a good value for the growth shown in recent earnings reports. Shares have an Outperform rating at Wedbush with a $79 target. Tractor Supply Co is the dominant niche retailer for the farming industry and has room for expansion, currently no debt on its books."

By the end of the day 1,899 of the July $65's traded, all buyers, paying $0.88 to $0.95 for the calls.

Shares are likely to make a run at the $69 resistance on the bull flag tomorrow and the calls should price at least $4 at some point in the day, a fantastic 300% gain.

It goes to show that following the action in options, and not always the large 1,000+ block trades, can lead to great trading opportunities as many people with insider info at these companies tend to accumulate calls in small amounts to build a position "under the radar."

When the bullish call action aligns with a great chart and a fundamental reason to be bullish, the trades have a very high success rate.

URS Corp with Late Day Call Buying: Banking on Further Stimulus?

2010-07-06T15:03:00.000-07:00

URS Corp (URS) traded 12X average call volume as more than 2,000 August $40 calls were bought just before 3:30pm with shares at $37.75, paying $1.15, near the $1.20 offer with a $1.05 bid. Shares made a clear double top at $52.50 and are looking for support here around $38 to develop a trading channel.

Earnings are expected in mid August and the engineering and construction firm trades cheap at 10.2X earnings, PEG of 1.1, 0.8X book, and 9.7X free cash flow.

The Company recently acquired Scott Wilson in a sweetened bid for the consulting firm based in the UK.

URS was cut to Neutral from Buy at Gleacher on July 1st as an industry downgrade as economic stimulus spending winds down. However, there was some talk today of further stimulus and that would be a big plus for this group, and call buyers look to be betting on upside in shares.

Vivus (VVUS): Trading the July 15th FDA Panel with a Mountain Spread

2010-06-29T04:46:00.000-07:00

Ok, so Mountain Spread may not be the official name, but that is what I call the double ratio spread due to the appearance on the P/L graph.

Anyways, trading FDA decisions with options is one of the smartest trading strategies because you can clearly define your risk.

Without going into details of the details of the Vivus (VVUS) FDA Panel I can take a look at a spread that provides a wide profit range for an expected big move in shares. This is the first step for Vivus, just the panel, with the decision not until October 28th, so I expect a somewhat muted response.

The at the money July $10 straddle is pricing $5.80, expecting around a 60% move in shares as the Panel weighs in the day before options expiration. The July IV sits at 340% compared to August of 216.9% and September of 181%.

I would note that most of the action the past 2 weeks in Vivus options has been bearish, although a 2,000 contract July 13/7 bull risk reversal traded yesterday, including:

May 28th: "Vivus (VVUS) with the first few signs of bearishness as July options get active, as 4,000 July $20 calls are sold at $1 and 4,000 July $10/$5 put spreads are bought at $1.90, net $0.90 debit in the bearish covered reversal play. The action comes as shares near 52 week highs, and are playing the key FDA date of July 15th. The Company will present Phase 3 Avanafil data next Tuesday for erectile dysfunction, but the real focus is on Qnexa, seen as the leading weight loss drug that has the potential to come to market. The FDA will review the drug on July 15th, and July IV of 200% shows that this will be a make or break day."

However on May 11th I noted this large trade that sees eventual approval:

"Vivus (VVUS) with a crazy late day spread as 20,000 September $20 calls are sold at $0.80 and 10,000 December $20 calls are bought at $1.60, a zero cost ratio calendar spread. The trade plays off the 129% vs 115% IV spread and is also playing for a positive reaction to July 4th FDA PDUFA for its obesity drug, although seeing near term upside at $20 come September, but potential for further upside with partnerships, takeover, etc. later this year. Vivus has seen some bullish buying in OTM May calls today and has recently been rumored as a potential partnership coming, shares near recent highs at $12.50, looking to breakout. The trade is profitable in September all the way to $22.50 for shares. Vivus has 4 upcoming presentations at Investment Conferences this month, and it's Qnexa looks to have the early edge for the most effective and safest obesity drug."

There are clearly defined support levels for Vivus with $9, $7, and $5 the major support levels and even if the Panel is "rough" the Company also has an ED product in the pipeline, so downside will be limited to $5 in my opinion. A positive opinion would rip shares through the $13 highs and target North of $15, although there would likely still be some hesitancy for the actual FDA Decision in October, and considering ARNA and OREX have competing products that could also come to market. Assuming the options are priced correctly a move to $16 looks suitable on a positive opinion.

There are a ton of ways to trade these binary events, and one way is to sell the OTM calls in the front month and buy further out of the money calls in a further out month as a bet on a positive ruling and then another possible run up into the FDA decision in both price and volatility. This is a strategy I used in ITMN very effectively.

Getting back to the use of a Mountain Spread, I constructed a zero cost trade where you buy the July 13/16 1X2 ratio call spread and the July 8/6 1X2 ratio put spread.

The trade makes no money, but loses none as well, with shares between $8 and $13, as I expect shares to move outside those points. This trade could potentially be put on for a net credit if you wait until the volatility runs up ahead of the event and the tails get fat. The max profits on a downside move is $200 per spread with shares at $6, profitable between $4 and $8, while the upside reward is $300 on a move to $16, profitable between $13 and $19. Note that is shares rise above $19 or below $4 your risk is unlimited because of the naked short put/call positions, but I see this as unlikely.

Below shows the P/L graph in what I feel is a high probability trade with a nice reward/risk structure:

I like this play much better than simple vertical spreads where you are basically playing roulette betting on which way shares will head and risking losing your entire debit, so I would rather construct a trade that is profitable, and provides for only the loss of commissions is a wide range for shares that I feel should hold given the options pricing and fundamental views of the event....

Research in Motion (RIMM) Earnings 6-24

2010-06-24T13:16:00.000-07:00

Below is the Earnings Preview I provided to Clients on 6-23:

Research in Motion (RIMM) earnings on 6-24 are in focus this week and MKM, Baird, William Blair, and Susquehanna are all out with previews, a day after shares fell as a Goldman Analyst remained negative into earnings. RIMM is losing market share in the US due to competition from HTC, Google Android, and the Apple iPhone, but is seeing growth in International markets. The average Analyst estimate for the quarter is $1.34 with $1.20 the low and $1.38 the high, revenues expected to be $4.35B. Shipment guidance is for 11.2M to 11.8M units, and ASPs of $305-$310. Net subscriber adds are expected in the 4.9 to 5.2M range. Risks to the quarter include market share loss and margin shrinkage as well as negative currency impacts.

Evercore partners feels that the Nokia pre-announcement is a positive for RIMM to meet expectations and even a mediocre report can support the shares. Shares are trading at a 5 year low valuation and Evercore sees downside risk to $55 based on a 10X FY11 estimate.

MKM is looking for results above the consensus and sees 11.5M units. MKM sees Android worries overblown and says channel checks indicate growth in web browsing on Blackberry's from January to June, 29% of the mobile browsing market. MKM does note potential concerns for 2H 2010 on European austerity measures that could cut consumer spending in Tech, and International is RIMM's best performing market. MKM rates shares a Buy with an $87 12 month target.

RW Baird notes concerns on Android stealing market share but notes that the valuation is attractive and maintains an Outperform with an $88 target. Baird sees a boost in US sales from the recent Bold 9650 launch and with International sales accounting for 53.8% of sales, growth is being driven by developing markets. Baird forecasts 11.5M unit shipments and net adds of 5 million. Baird sees 11.9M units guidance for Q2.

RIMM shares are trading near the $55 support level, at $58.85 today with 2 days until the earnings announcement and if we see any more pressure into earnings it sets up for a potential bounce on any good news. A catalyst for this is that RIMM could announce a new product this Quarter to try and compete with all of the innovation competition. Shares do have an unfilled gap down to $50 from April 2009 earnings, and a break of $55 should let shares fall as far as $45.

Basically what we have going into earnings is a stock that is still growing and very cheap on valuation, but beaten down due to competitive pressures and a lack of any new blockbuster products. Near term upside in shares is likely limited to $65, while the potential for downside could be as low as $45 on a guidance cut.

The options market has given a few clues as to what to expect, yesterday with a seller of 7,900 July $57.50 puts at $2.06 tied to 140,000 shares short at $60.14. The risk profile of that trade is that it makes money from $54.40 to $72 on shares, max profits at $57.50, so the trade does see limited downside, willing to buy 790,000 shares at $57.50, covering the short position and taking on a long position. Another trader put on a 1,000 contract September $42.50/$75 bull risk reversal for a $0.04 credit, a high reward potential play that is safe as long as shares do not crash through $42.50, unlikely as that would imply a forward PE around 8. I will continue to monitor the action up until earnings.

July IV at 54% compares to August of 44.6%. The straddle was a better sell the past 2 quarters. The 12% spread in IV's is lower than the 15% spread last quarter with about the same amount of time reaming until expiration, so a small move is implied.

I am looking at a few trades for earnings with option strategies:

One trade is a broken winged butterfly in July, $50/$55/$57.50 for a $0.12 credit with a profitability zone from $52.40 to $57.40, and keeping the credit to cover commissions if shares climb above $57.50. The strategy loses money below $52.40, a maximum loss of $238 per spread if shares hit $50. Maximum gains is at $55, a likely battleground level for shares. This is a bearish play but sees limited downside, betting that the initial reaction could bring in buyers and push shares back to around $55.

The similar play with a slight bullish bias is the July 57.5/60/65 broken wing butterfly calls spread for a $0.28 Credit, profit zone with shares below $62.80, max profits at $60, and keeping a $28 credit with shares above $57.50, covering commissions. This trade has a slight bullish bias, seeing limited upside, max loss of $222 on shares climbing above $65.

Thirdly we have the July $62.50/$65 Ratio Call Spread for a $0.30 Credit, profitable below $67.80 for shares, keeping the credit with shares below $62.50, and max profits on a move to $65:

It looks as if shares are trading 2% lower after hours on mixed guidance. The idea that there was limited downside and better chance for upside was correct, but we will see how it trades tomorrow.

After all this my idea of the strangle sell yesterday looks to have been the best play here:

Google Case Study: The Art of Ratio Spread Trading on Options Expiration

2010-06-19T15:59:00.000-07:00

It is no secret that on options expiration certain stocks pin to key strikes for "max pain" as institutional traders attempt to push the stocks to a certain level so that certain options will expire worthless. Without going into the details of exactly what Options Pinning is, as the information is readily available across the web, I am going to show a high probability trading strategy that can allow you to trade 1 day a month a reap big time profits.

Some of the stocks that commonly exhibit this phenomenon include Google (GOOG), Apple (AAPL), Visa (V), Amazon (AMZN), Union Pacific (UNP), US Steel (X), Baidu (BIDU), Goldman (GS), FedEx (FDX), UPS, WellPoint (WLP), First Solar (FSLR), Freeport McMoran (FCX), Wynn Resorts (WYNN), IBM, Potash (POT), Research in Motion (RIMM),Oil Services (OIH) and a few other heavily traded names with liquid options.

Looking over some of the closed from Friday we have OIH at $105 exactly, AAPL at $274, WLP at $55.22, FCX at $65.90, GOOG at $500.03, WYNN at $85.03, IBM at $130.15, POT at $99.36, and BIDU at $74.09; all within $1 of the respective pin strikes.

Ratio spreads are seen as risky strategies for longer term plays as the trade is naked short options and comes with the added risk of taking on the shares if the stock makes a volatile and unexpected move. However, on the day of or day prior to options expiration there is the advantage of the extreme volatility implosion to be able to sell naked calls/puts against a long call/put position to lessen the entry cost of the trade.

This past Friday I was looking at Google (GOOG) as a prime pinning candidate, opening the day around $502.50, very close to the $500 level, a fat round number with a ton of open interest in the calls/puts. I easily could have put on a better trade earlier in the day, but was sidetracked, and still was able to find a great high probability and high reward trade at 12:26pm.

The Trade: Long the June $490/$500 1X3 Ratio Call Spread at a $5.90 Debit

Here is the time-stamp from my live chat room:

Here is the trade P/L Graph:

Here is the chart of how Google traded on Friday, resulting in max profits as shares closed right at $500, a 69.5% gain in 3.5 hours of trading, and something that can be done month after month. I very easily could have done the spread in a 1X5 ratio for even larger percentage gains, but also comes with the added risks, but something to keep in mind especially on a very slow quadruple witching day like we saw Friday.

Trading one day a month for 69.5% gains, compounding, is not a bad way to trade, and leaves time to for the greater joys in life....

*** I Have to Give a Shout Out to Jeff Augen's "Trading Options at Expiration" that Discusses Many of these Trading Strategies***

Nike (NKE) Pinned to $75 - Trader Makes Bank

2010-06-18T11:27:00.000-07:00

Seeing Nike trade is a ferocious $0.30 range today and thinking it pins to $75 reminded me of a story I put out to clients back on May 25th:

"Nike (NKE) starting to rise here after a morning upgrade at Argus to Buy with an $82 target. The trader put on the June $72.50/$75 ratio call spread, a bearish bet on volatility and bullish price, max profits on a move to $75 while keeping the trade credit of $0.15 if shares remain below $72.50, currently trading $71.60. The trade is profitable for shares up to $77.65. As I noted earlier shares look to be forming a bottom with higher lows, and do not look likely to return to the major breakout level of $66 from March. Shares trade 16.4X earnings, PEG of 1.65, 1.86X sales, and 16.5X cash flow, fairly valued and boosted by growth in Asia. Nike could also see a Summer rally as the World Cup approaches in early June, as a major sponsor to the much anticipated event."

With 90 minutes left in the day, it is looking like this $0.15 credit trade will result sin a $2.50 return....one heck of a trade and a shout out to the trader that nailed this move...

Covanta (CVA); Suspicious Timing with News on Options Expiration

2010-06-18T04:38:00.001-07:00

Covanta (CVA) shares are 6.8% higher to $17.92 in the premarket on news of a special cash dividend, increased buyback, and reaffirmed guidance, announced after the close last night.

I found this one particularly interested because I remembered there was a lot of options action in this name months back, and it just happens that the action was in the June strike which will expire today.

Back on March 30th, more than 12,500 June $15 puts were sold to finance the purchase of 12,500 June $17.50 calls at a 20 cent debit. The action amounted to 25X the average options volume. Looking at open interest there is 19,631 OI in June 17.50 calls and 14,385 OI in June $15 puts, so the traders in these positions were not chased out when shares fell all the way to $14.50 as unrealized losses mounted in the risk reversal trade.

With this announcement the position will likely be closed today for at least $0.50, a 150% gain, saved by the bell on options expiration.

The timing makes you wonder just how much of a surprise this announcement was for the trader that took this massive bet in a thinly traded name and did not cut his/her losses as shares tanked.....

Eclipsys (ECLP) Bought in $1.3B Deal Week After Unusual Options Trading

2010-06-09T03:19:00.000-07:00

Today, it was announced that Allscripts (MDRX) will acquire Eclipsys (ECLP) in a $1.3B deal, $22.10 per share in an all share deal (1.2 shares for every 1).

The takeover comes less than a week after I provided the following alert to clients:

"Eclipsys (ECLP) is trading 4.4% higher at $20.10, and more than 2,059 calls have traded, 10X average with 65% offer side buys in July $22.50 far OTM calls. Shares are making a big move today after consolidating higher following an earnings sell off. Eclipsys is a smaller player, $1.11B market cap, in the Healthcare IT space where larger players Cerner (CERN), Quality Systems (QSII), and even GE operate. Shares trade rich at 21X earnings, PEG of 6.3 and 2.14X sales, but it still can be an attractive takeover candidate. I am not seeing any news or upcoming catalysts associated with the relative strength today, which makes this options action intriguing."

I am interested to see how this one trades because the shares of ECLP could break above $22.10 if MDRX shares react positively. The interesting part is that the option traders were buying the $22.50 strike calls and may not benefit from this deal that values shares at $22.10.

It just goes to show, sometimes having some insider info can still result in a loss if not using the right strategy.....

Risk Reversals Popular Friday: BKS Bull / LM Bear

2010-05-23T06:26:00.000-07:00

The high volatility environment is opening up major trading opportunities in options, and one of the riskiest strategies is being employed to bet on certain stocks to bounce and others to continue to fall with risk reversals.

I was just going over some options data from Friday and these two were interesting large institutional bets.

Barnes and Noble (BKS) saw a very bullish bet late in the day just before 3pm as 2,500 June $17.50 puts were sold at $0.73 and 2,500 June $22.50 calls were bought at $0.33, a net credit of $0.40. Therefore, the trader is willing to get long a ton of shares at $17.50 and keeps the credit as long as shares do not break below that level, but also the strategy can make a ton of money if shares break higher and the calls become more valuable than the puts. Shares are near 2010 lows and have a lot of support from big investors, some reportedly that could take the Company private. There is a 31% short float, 14 days to cover. Shares trade 21.4X earnings, 0.2X sales, and 1.13X book value. A near term catalyst could be sales data on its digital reader it recently launched.

Legg Mason (LM) options volume was 5X average due to 1 large bearish risk reversal for 5,500 contracts in August. The trader sold the August $35 calls and bought the August $25 puts for a net debit of $0.30, shares at $30, betting on at least a 16% fall in shares in coming months. Shares formed a potential double top around $34 and financial reform could hurt results going forward. The asset manager trades at a PEG of 3 and 0.85X book value. Shares are already trading near most Street targets, so downgrades could occur. The Company recently announced the successor to Bill Miller, a legend, so there could be some loss of faith in the Company and clients could move elsewhere. April AUM (Assets Under Management) was $685.3B, no growth from the prior month.

Intermune: "Smart Money" Blinsided

2010-05-04T14:25:00.000-07:00

Wanted to review how bullish the institutional traders were in ITMN, shares down 80% after hours of FDA Complete Response Letter. Luckily I sold front month calls and bought further OTM June calls for a large net credit, so I am sitting pretty, showing how designing the right options strategy can really save your bacon.

Rundown of the larger trades in options recently (Although today a trader bought 2,000 May 35/25 put spreads at $3.15 (going to be worth $10))

Recent Options Action:

April 29th: Trader Buys 110,000 Shares of Stock and Puts on 3,000 contracts of the May 60/22.50 Collar; Trader Sells 750 May 55/35 Strangles at $8.55

April 28th: Trader Buys 1,000 May 55/65 Call Spreads at $2.30; Trader Buys July $50/$70 Ratio Call Spread for 900X1,800 Contracts at $3.40

April 27th: Trader Sells 1,000 May $35 Puts at $4.40; Trader Buys 1,400 July $70 Calls at $2; Trader Buys July 44/60 Ratio Call Spread for 1,300X2,600 at

April 26th: Trader Buys 7,000 January 55/75 Call Spreads at $5.75

April 23rd: Trader Puts on May/June $47 Calendar Call Spread for 600X; Trader Buys the May 40/25 Ratio Put Spread for 750X1,500 at $1.80; Trader Puts on May/June 65/70 Calendar Diagonal at $0.20 for 1,800X;

April 22nd: Trader Sells 3,000 May 60/22.50 Strangle at $3.40

April 13th: Trader Buys 5,000 May $65 Calls at $1 and Shorts 70,000 Shares at $47.97

Option Traders Turning Cautious: Pullback is Underway

2010-05-02T07:31:00.000-07:00

The market has had a huge year, and it's only May, but we have not had a real pullback since January/February. There was that sell-off back on April 16th where I saw just about everyone in the media, on twitter, etc. throw the towel in and assume that the market was ready to make a move lower.

However, I stuck with my bullish these because I continued to see all bullish action in the options market, a lack of put buying for downside bets, or even for hedging large unrealized gains. The market abruptly snapped back and made a move to new highs, and that buying on the dip worked out very well.

I have recently been adding short positions and buying puts against the S&P and Russell (SPY and IWM) along with certain industry specific ETFs. I anticipated a head and shoulders forming on the S&P on the 20 day chart early last week and it is shaping up now for a breakdown at 1,185, implying a move to 1,150 which happens to be our prior breakout level that will serve as support. The move makes too much sense not to be making these bets.

The reason for my shift to a slightly bearish bias is that sentiment has changed in the options market as I am seeing institutionally sized bets against the S&P, Russell, Emerging Markets, Regional Banks, Semiconductors, and the Nasdaq.

Throw away the Put/Call ratio statistics that everyone quotes for the sentiment in the options market because it does not have any value, as it does not show if the puts/calls are being bought or sold, making the number basically worthless. I am finally beginning to see buyers of 1,000+ contracts on the put sides in high flying stocks, and buyers of 30,000 put spreads in the SPY and IWM, so fear is coming back, and I am not talking about the misunderstood VIX that has climbed back, although it is making puts more expensive, likely why I am seeing a lot of bearish vertical spreads trade, minimizing the impact of the increased volatility.

I also include he fact that I have been long gold miners as part of my bearish bias, as the the flight to safety is in full effect and profit taking is hitting recent leadership stocks. Just take a look at some of the recent gaps higher in earnings that have abruptly been sold into and filled the gaps on the way down. There is just a lack of buying here, and profit taking. Check out the Utility companies that have rallied in the face of a weak tape, another sign that investors are clamming for the safety in dividend yields and gold.

Throwing in the worries in the Euro Zone, Goldman, and the Oil spill and we basically have the Perfect Storm for a pullback.

Refiners Set to Stage a Rally

2010-04-26T19:49:00.000-07:00

Oil is showing that it is likely to be stable in the 80 to 90 range for awhile and be in the sweet spot for the refiners. The much maligned group is starting to show some life, and many of the names are trading relatively cheap on an earnings basis and on a cash basis.

Over the past two weeks I have seen a lot of bullish call buying in Sunoco (SUN), Valero (VLO), Marathon Oil (MRO), Tesoro (TSO), Frontier Oil (FTO), and Murphy Oil (MUR).

Much of the action is taking place out in August and September, looking for sustained rallies in these stocks. Valero earnings are tomorrow morning and options traded as follows today:

Valero (VLO) traded 67,600 calls ahead of 4/27 earnings, including a buyer of 16,000 September $25 calls at the 50 cent offer. Call volume was 5X average. Shares are looking to breakout of a bullish consolidation. The May/June $22 call spread traded 1,300X after trading 2,000X earlier in the day.

The technicals are also setting up for many of these names as follows:

Hess (HES): Looking to stage a major breakout at the $66 level.

Holly Corp (HOC): Put in a double bottom at $24 and breaks back above 200 day EMA

Marathon (MRO): Broke key resistance at $32.75 and $35 is an easy move from here.

Murphy (MUR): Consolidating and looking to bust out at $62.

Tesoro (TSO): Remains stuck in a channel down pattern with another breakout above $13.75 likely to shift the downtrend into an uptrend.

Crosstex (XTXI): If this thing breaks $10 it has a ton of room to run

Western Refining (WNR): A break above $6 takes this one back to $8 and the 28.6% short float will help that move along.

Sunoco (SUN): Broke out of long term downtrend at $29 and should ride to $35 and then $45 from here.

Valero (VLO): Major consolidation here with $21 a massive triangle breakout

Saving the best for last we have World Fuel Services (INT) which broke out today and has a 14.5% short float, 12.2 days to cover, also one of the best value plays of the group. This one has major upside potential.

This is a group where you can buy some LEAPs, or longer term dated bullish bets, as I fully expect the group to become a top performer in 2010, and also expect consolidation among the major players.

I never thought I would say this, but you need to have exposure to a refiner because fundamentals, technicals, and smart money action are telling the bullish story.

Options Trading: The Importance of Technical Alerts

2010-04-10T10:51:00.000-07:00

Throughout the course of a normal trading day I must look at at least 1,000 charts, and I make sure that on every interesting chart I set breakout and breakdown alerts. I use ThinkorSwim, and most platforms should allow for audio alerts. I generally use simple price level alerts, although you can also set alerts for any technical indicator (RSI, MACD, etc.) and even for the prices of the option contracts.

I find it is so important to have these alerts so you do not need to watch the same charts all day long, and once the alerts sound it is time for action. On a side note, I use various animal sounds for my alerts (Hawk, Jaguar, Goat, Panther, etc.) to add a little excitement, but that's just my style.

Once an alert sounds I look for the option contract that provides the greatest return for the technical level I am looking for shares to reach, and also take into account the Implied Volatility of the strikes, and the liquidity, often opting for contracts where there is active volume trading and 5 cent bid-ask spreads.

Two recent examples this week were big money makers in the matter of 1 day.

Conoco Phillips (COP) is a simple horizontal channel that formed and was lagging the recent resurgence in Oil, so I set a $53.25 alert for the breakout. On April 8th shares broke that level and I alerted clients to buy the May $55 calls at $0.95. The following day the breakout continued and I opted to take quick profits at $1.60, contracts ended trading as high as $1.75. A 68.4% gain for a 1 day holding period, and I generally take $10,000 to $15,000 positions per option play. Equity traders, this is why you should be playing options. If you are confident in your stock picking abilities and technical calls, there is no excuse not to be trading options, you can make a lot more money per trade.

Quality Systems (QSII) was another great example last week with shares breaking out of a bull flag consolidation, triggering an alert at $62 on Thursday, and I also liked the fact there was a 29% short float. I recommended clients buy the March $65 calls at $1.50, despite the fact there was not a ton of liquidity. On Friday shares rallied 3.8% higher and touched my target of $65, so I recommended taking some off at $2.35, a solid 56.7% 1 day gainer, although I still have a position in those calls.

It goes to show how having alerts set lets you get in on the action well before everyone else, and 60% or more gains in the span of 1 trading day become the norm....

Mid-Week Market Rant

2010-04-07T19:38:00.000-07:00

The market should rebound quickly from today's mini-sell off with 1,175 solid trend support, and once the Masters starts tomorrow this market will grind higher when a buyer of 5 S&P Minis comes in......

After hours we had UAUA/LCC Merger Talks, FCX positive comments, BBBY strong earnings, and Bove out positive on JPM with a $102 value analysis....that is a lot of good for a Wednesday night ahead of earnings season.

The Fertilizer stocks have been incredibly weak since Mosaic reported, but the story is still bullish for 2010. Take a look at Agrium (AGU), it just filled a big ole' gap and I would be buying here.

Solars were hot today following JASO guidance; CSIQ looks the best on the charts, but WFR remains a must own name longer term, going to be quite a comeback story in 2010.

Infosys (INFY) is actually one of my most anticipated earnings for next week. Not sure why, but I feel like it should double top here and stay below $60 for awhile.

Biotech is hot right now, especially the speculative ones. The names you should have (and would have if you were a subscriber) owned over a week ago include ZIOP, DCTH, ALTH, IMGN, and POZN. Stay away from the big guys like AMGN, GILD, CEPH, CELG, BIIB, and GENZ for now, that run got old fast.

DNDN and ITMN start off early May with big FDA decisions...ITMN is going to 50, and DNDN I see 50 as well (May 45/50 ratio call spread 1X2 is nice, but wait for the fat tails)

Those that know me realize I will trade any stock and have a huge window of names I follow every day, which is why I offer you the following Buys for those of you looking to hold a position 9 months, about 8 months and 25 days longer than I do, and they are VAL, SNA, ADTN, PMTC, AME, GGC, MNI, AVID, MTX, TPC, AER, LUK, SY, and ERTS, yes ERTS.

Stay away from Chinese stocks here...Period!

Paper and Packaging get son hot streaks that should not be ignore, you'll want to check out IP, UFS, OI, RKT, MWV, and BLL...in the end it is the ultimate consumer recovery play.

Baseball Season is here and the MLB Package is Sweet...Long DTV so you can watch Teixeira continue his hitless streak.

CommScope (CTV) is often ignore, but a great chart and should be bought. While I am looking at Hardware stocks, Vishay (VSH) sure looks ready for a leg higher.

Tower stocks should be traded like the plague...AMT, CCI, SBAC - Sorry but the fairy tale story is over, pay your debt.

Not a fan of housing stocks here, first group to see profit taking, followed by Retail.

Some of these recent IPOs are looking great, just wish there was better info easily available. IRWD, AVEO, ACOM are tempting

TEX was my favorite chart when the week began, but CBI is looking good to me here on this pullback.

Medical Device stocks, jeez, boring...not much to do here as we see the impact of Healthcare Reform. DGX, VAR, RMD are three I like, the rest are just boring although that Analyst that took ALGN stock down is dead wrong.

Gold Gold Gold...CNBC starting to pick up on it, usually a contrarian indicator, not this time though, it is breaking out and if you don't own IVN, GFI, NG, NEM, GOLD, GG, or at least a few of them, you should probably find a different career path.

Oil feels much more like a bubble here, too many bulls, I say it sees 80 before 90, and that will be the buying opportunity, until then PXD is a ripe short.

Pair Trade? Long MHS...Short ESRX...spread has gotten too wide, and should narrow.

If it involves food/eating you should own it, this includes PNRA, BWLD, RT, RRGB, CAKE, SONC, TXRH. I have to sell 5 shares of BIDU each week just to pay for weekend dinners...and the restaurants are all packed.

Semiconductors are way too quiet, and the SIA numbers were fairly strong so it is time to dabble in FORM, SLAB, CY, ATHR. Stay away from KLAC, always the best short when the group falls.

The QSII, CERN phenomenon has quieted down but I love the story here, electronic health records and such, and I would be a longer term buyer of both, LEAPs a good choice.

I love Software right now, some great opportunities there and I see all the following as likely takeover candidates once M&A starts roaring again, and it will: TIBX, DOX, ADSK, BCSI, CSC, NUAN, SY, ROVI and just maybe BMC.

Truckers may be the most overbought group and this Oil situation is going to hurt again, stay away from CNW, LSTR, etc...and short KNX. Always a fan of the Rails though, going to be lots of stuff to move UNP, NSC, KSU, GWR, CSX.

Well covered all my watchlists, so thats my mid-week rant...rarely have time to do this, but it felt good.

McKesson (MCK): How to Make Thousands of Dollars in 15 Minutes Trading Options

2010-03-30T20:24:00.001-07:00

Today, in the Live Trading Chat I offer via OptionsHawk.com for MAX subscribers, a rather quiet trading day turned exciting in the last hour.

McKesson (MCK) was the stock in focus, and at 3:24pm I began to notice out of the money call buyers pushing implied volatility higher and causing a major bend in the volatility skew, showing an increased demand for the out of the money calls. Surprisingly there was no news, and shares began to climb rapidly, which is common as we are often well ahead of market chatter in my chat, but this time news never came, and still has not come out as it nears midnight on the East Coast.

Around 12:29pm there was scattered buyers of the May $70 calls at the offer, shares trading at $65.32, but nothing out of the ordinary, so I let that pass. Then, at 3:21pm the action heated up and IV began to jump, May 70 calls targeted in small chunks, so I put out the alert.

At 3:23pm I knew this was for real as a buyer of 500 April 67.50 calls paid the 35 cent offer, very speculative with shares at $65.63 a couple weeks from options expiry in normally quiet name with those calls having an 18% IV. And then the April 70 calls began to see buyers coming in, blocks of 300 and more, paying the 10 cent offer (Note that the monetary value of $3,000 for the play is small, but people generally are against just throwing away money).

Share volume began to pick up as well, so it was confirmation that this action was for real as Level 2 showed the exploding demand for shares of MCK.

A few of my clients and I got long calls in McKesson, leaving it open to my clients as a purely speculative play. By 3:38pm, a mere 14 minutes later the April 70 calls were trading for 45 cents, buyers at the offer, a solid 350% gain in less than 15 minutes. The April $67.50 calls were trading for $1.10, a 200%+ gain.

Call volume of 11,686 currently is 13X average and shares are now up 2.5%, breaking to new 52 week highs. Shares trade 13.8X earnings, 0.16X sales, and 9.6X cash flow, extremely cheap on valuation for a $17.6B market cap.

I received a lot of thanks from my clients for making them thousands of dollars in 15 minutes, and I cashed in most of my position as well.

Not bad for a $300 a month service....and with a lesson to be learned...

Do Not Let the Market Lull You to Sleep, the Next Big Trade Could be Seconds Away

Northern Oil and Gas (NOG): A Breakout to Buy

2010-03-27T08:34:00.000-07:00

MEMC Electronics (WFR): Options Action Hot with Potential Breakout

2010-03-23T19:43:00.000-07:00

MEMC Electronics (WFR) traded 5X average call volume, 30,000 on the day, including a buyer of 2,500 April 15 calls, 2,500 July 20 calls, 2,000 April 13 calls, 2,000 July 17 calls, 2,000 May 16 calls, and 1,500 October 20 calls, a lot of bullish action. Implied volatility rose 4.7% to 45.7%. Shares are nearing a major breakout around $15.50 and are often mentioned in takeover chatter.

Back a few days ago, March 17th, there was a buyer of 4,125 April 15 calls at 56 cents, above the offer, also selling a block of January $12.50 puts. There was also a buyer of 1,575 April 14 calls. Similar bullish action was seen on March 11th and 12th, buyers in size picking up calls at April 14 and 16 strikes.

Implied Volatility (60) has gained from around 38% to 41% the last week or so, a subtle move.

MEMC (WFR) is actually a solar play that has earnings, expected to gain $1.23 next year, trading 12X forward earnings. The Company also has $700M cash on hand, market cap of $3.37B, so roughly 20% of its market cap.

In 2008 shares were trading North of $75/share, so this one sparks my interest as a comeback play. Taking a look at the chart a few key resistance levels are about to come into play. The $15.30 level coincides with the 200 day EMA as well as the prior breakdown level from earnings last November, while $16 is trend resistance off the lower highs prior to the breakdown. The current pattern is a developing "W" bottom, a reversal pattern.

The July $16 calls can be had for $1 and look to be a major bargain.

Acorda Therapeutics (ACOR): Interesting Options Strategy

2010-03-17T18:18:00.000-07:00

Acorda Therapeutics (ACOR)did not participate in the bullish market move today as shares fell 0.7% and IV sunk 4.6%. One trader put on a bearish spread for the longer term time horizon with a July/October $35 calendar put spread, selling the July's at $2.90 and buying the October's at $4.40, a $1.50 debit for 5,000 contracts. The trader is bearish volatility , and eventually feels shares will return to Earth after climbing more than 40% this year.

Shares have the potential to make a double top with 2008 highs. The trader may feel that shares will trade sideways, and after July we could get some further data on the efficacy of Ampyra, Acorda's blockbuster MS drug. Ampyra started to sell in March, so we should get sales figures later this year, and it may not live up to expectations, and the FDA did note some potential safety issues with drug, but did not go as far as to place a black box warning.

The risk/reward is as follows:

Polycom (PLCM): Hot Options Action Saw Potential Takeover Deal Coming

2010-03-17T04:48:00.001-07:00

Polycom (PLCM) shares are trading 7% higher pre-market to $32.55 on reports in the FT that Apax wants to take the Company private for $3B, roughly $37 a share, after closing yesterday at $30.44.

Please see my post 5 days back on the inverse head and shoulders breakout that triggered a buy a $28, but I want to discuss the options action in this name that confirmed the breakout and made it a good bet.

On March 15th I sent the following note to clients:

"Polycom (PLCM) is a stock I highlighted last week as one of the nicest breakouts in Tech and shares are 1.9% higher today in a weak tape, with IV jumping 11% as call volume is 3X daily average, more than 1,700 April $30 calls bought offer side. Shares broke out of a massive inverse head and shoulders on the weekly and look certain to make a run at $35. Shares are a bit pricey at 17.2X earnings, 2.6X sales, and 17.3X cash flow, but the Company is involved in the hot area of video communications and should benefit from the recent Cisco news regarding network speed improvements."

That was my first focus story on Polycom, but I had been discussing the "buzz" in the calls for awhile in the daily live chat. The action really started on March 12th when the April 30 calls had offer side buying of multiple 200+ lots of contracts at 90 cents, and July 30 calls were active as well. This out of the money speculative call buying coinciding with active volume in equity shares and a jump in the implied volatility was a tell-tale signal that something was up with Polycom.

Yesterday, March 16th, the action continued as 4,400 calls traded, 8X average volume with big buyers in the April 30 calls once again, the largest block of 1,000 paying $1.65 on a $1.45 - $1.65 bid/ask spread, showing the aggressiveness of the call buying. Some argue that there are two sides to every trade, a buyer and a seller, but by following the order flow you can judge the aggressiveness and the intention of the position, and in this case it was obvious the buyer wanted in badly, and was willing to pay up.

Once again, following the smart money in options pays off huge....

Valspar (VAL): Painting a Bullish Picture

2010-03-11T20:04:00.000-08:00

Valspar manufactures paints, primer, coatings, and other related products for use a variety of industries, ranging from building materials to packaging for consumer products.

Shares trade 13X earnings, 1X sales, and 22.5X cash value, a fairly good value and roughly in line with Sherwin Williams (SHW), one of the largest paint producers. Valspar has a market cap of $2.9B, and last received Wall St coverage back in August when KeyBanc rated shares a Buy with a $32 target.

Valuation is fairly attractive, but the thing that caught my attention is the chart and the options action, my personal favorite indicator.

Taking a look at the chart below you can see shares cleared a major hurdle around $27, and have consolidated, but are beginning to breakout again, and just had a bullish MACD crossover on the weekly.

Today, in the options pit I noticed some unusual action, as 20X average call volume traded and it involved the July $35 calls, more than 17% out of the money, buyers paying 30 cents in contracts that began the day with a 5 cent bid. Valspar has an implied volatility reading of 26% in July, with earnings in May the next clear catalyst.

These calls that were bought today look to be betting on a takeover, and a deal would make sense for Valspar. The action is too odd to ignore, and reminds me a lot of when I saw some far OTM call buying in future dated months in AirGas (ARG), just days before it received a buyout offer.

SunTrust Bank (STI): Bulls Pile In Ahead of Conference Presentation

2010-03-10T05:16:00.001-08:00

SunTrust Banks (STI) shares closed slightly higher today, off mid-day highs which were 52 week highs, and options action surged late in the day. More than 14,250 calls and 11,000 puts changed hands, 2X daily average volume. This is not too unusual, but the late day focus in the March $27 calls which traded 7,956 contracts against OI of 842 is alarming, traders paying the 22 cent offer for these calls that are nearly 5% out of the money, just 8 trading days until expiration.

Even more bullish is that many of these calls traded as spreads, bull risk reversals tied to the sale of the March $24 puts that traded 5,985 contracts. The outlay for this risk reversal was a 7 cent debit, so the monetary trading value is minimal, but still shows that traders are taking bullish bets for a surge in shares of the regional bank. Shares of SunTrust trade 5.16X cash flow, 2X cash value, and 0.57X book value. Shares broke out of an ascending triangle on elevated volume, implying a move to $28.50 is underway.

Much of the activity came in the last half hour of the trading session, and with this action coming on the same day the WSJ reported that Barclays is looking to acquire another US Bank, it looks like option traders are putting some money on that bank being SunTrust, and the deal being announced fairly soon. SunTrust will present at the Citi Financial Services Conference tomorrow morning at 8am, another potential catalyst.

Tivo (TIVO): Reading the Options Action Scores Another Big WIn

2010-03-04T13:31:00.000-08:00

On March 2nd, just 2 days ago I sent the following to clients in my live chat room alerting them of the bullish action in Tivo:

"Tivo (TIVO) with an early morning bull buying 4,000 April 12.5/15 call spreads for 50 cents, shares at $9.95. Implied volatility in Tivo is heightened at 118% ahead of 3/8 earnings and a potential court decision. Shares are trying to break the $10 psychological level which happens to be the 200 day EMA as well. The option trades are very bullish, requiring a 30% move higher to be profitable. There is a 10.8% short float, 6.8 days to cover, and it may be a takeover target at a market cap of $1B, easier than going through the court proceedings."

When I see the technicals, options action, fundamentals and a catalyst it is aligning all the stars, so I recommended getting long Tivo.

I usually am a gambler by nature, but played this one safe. Implied volatility was sky high in Tivo so I bought a few thousand shares at $9.95 and Sold the April $12.50 Calls at 85 cents against my position, effectively giving me a net cost in Tivo shares of $9.10.

I liked this trade here because if shares are called away in a month you have around a 30% gain on your hands, and are not subject to lose your shirt with an all out bet in call options.

As it turns out Tivo shares climbed 60% today, so I will likely let shares get called away for maximum profits. In retrospect I wish I had sold the $15 or higher strike calls against my position, but still a great trade!

Hershey (HSY): Is Nestle Looking to Use Some of It's Cash?

2010-02-21T06:50:00.001-08:00

Shares of Hershey gained 2.94% Friday, closing at 4 month highs, and trading 2.2X average volume, 3.6 million shares.

The 30 day chart tells the story:

Hershey (HSY) traded 19,212 calls Friday, 6 X average daily volumes, 52% offer side. The big buying action was in March 42.5 calls with shares just below $40, as 8,293 traded vs OI of just 315, very bullish action, potentially looking for a takeover. The recent Cadbury-Kraft deal has many seeing another deal soon to happen in this industry, with Nestle for Hershey the likely outcome. Traders were even buying March $45 calls at the 15 cent offer right into the close, expecting a 13% move higher in shares in a month, which would require a takeover, because Hershey stock is not moving 13% on valuation or technicals. Shares trade 16X earnings and 14X cash flow, not really that appealing from a valuation perspective for a consumer goods stock, but the brand has value that is tough to put a price on.

My bet is that Hershey is likely to get an offer in the next month, and I expect it to come in around $52, around a 30% premium.

Bullish Trader Sees Market Climbing 20% in 2010

2010-02-16T14:59:00.000-08:00

The largest trade in the options pit was a bullish call spread in the S&P (SPY), as a trader bought 60,000 December $124/$130 Call Spreads at $1.10,a 6.6 million dollar bet requiring a 14% move higher in the S&P 500 to break-even, and a 18.5% move higher for maximum profits, with the trader cashing out 36 million dollars if the markets rally 18.5%, a profit of 19.4 million dollars.

A move to 130 in the SPY would put us back to levels not seen since June of 2008, and based on the markets forward earnings ratio currently, it is not out of the question.

Terra Industries (TRA): Unusual Call Buying into Takeover

2010-02-15T08:16:00.000-08:00

Terra (TRA) is a name that has been subject of an attempted acquisition for quite some time, but has rejected bids, so I am not looking to raise any conspiracy theories here, but on February 9th I found it rather odd, with shares at $32, that a buyer would come in for 4,000 February $37 calls at 12 cents, 15.6% out of the money, and only a week and half from expiring.

With the announcement of the $41.10 offer from Yara International today that trader that put out $48,000 stands to make $1.64 million.

As soon as that trade crossed on the 9th I noted to my clients that is was very odd to see a trade of that size opened so far out of the money this close to expiration, and it seemed "fishy".

This is why it pays to follow the "smart" or in this case potentially "dumb" money as the SEC is sure to take a gander....

Whole Foods (WFMI) Earnings Strategy

2010-02-14T14:47:00.000-08:00

Whole Foods (WFMI) is sure to be a big time earnings mover Tuesday after the close, at least the options market is pricing in a large move, with the at the money February $30 straddle trading at $2.60, pricing in an 8.7% move. Even more alarming is that the February IV reading of 80% compares to the March IV reading of 49%, a very large spread.

Recent options action suggests that bears are targeting this name, with around 8,500 of the August 3-legged (Short $32 calls and Long the $27/$24 put spread)trading Friday, after the same strategy was seen Thursday, a $1.28 credit trade.

A look at the open interest in February option strikes shows that the February $28 puts have more than twice the OI of any other put strike, at 6,900. On the call side there is a combined OI of more than 11,600 between the February 28/29 strikes.

On Friday, 75% of calls more than 5% OTM were sold at the bid while 94% of the puts more than 5% OTM were sold at the bid, suggesting to me that volatility is overpriced.

Being long the at the money straddle ahead of earnings has profited immensely the last two quarters, with as much as an 18% fall in shares last quarter, and a 21% climb in shares the prior quarter. Interestingly enough the resulting reaction from earnings the last 4 quarters has been up/down/up/down, so if the trend remains we would expect a bullish reaction this time around.

On the chart we can see the $31.80 is a level to the upside that would fill a gap from last quarter, an ample target at a 6.89% move higher, still making the straddle look overpriced. To the downside we can see a large support zone around $27 where shares have bounced for the past few months, requiring a 9.2% move lower post-earnings, but also an area where we could see the weakness bought.

Looking at fundamentals we can see that shares are a bit rich on valuation at 24.2X earnings, a PEG of 2.37, and 20.15X free cash flow. There is a 9.9% short float, 7.1 days to cover heading into earnings.

As for what to look for from the earnings results and conference call it is best to go back to last quarter when the Company stated that lower prices are bringing shoppers back, leading to a surge in profit. With recent weakness in soft commodities likely resulting in lower cost of goods sold, Whole Foods should be able to benefit from some further gains in pricing power this quarter.

Analysts are looking for $0.26 and Revenues of $2.6B.

Based on all of the above I have a slightly bullish bias going into earnings due to the overly pessimistic view on the Street and recent price action leading into results, but I am also bearish on the expected move being priced in through the latest volatility readings.

The Strategy: A 1X3 Ratio Call Spread, Buying the February $30 calls at $1.20 and selling 3X the February $32 calls at $0.48, a 24 cent credit trade. This trade benefits from the volatility crush that is certain to occur and is profitable with shares finishing February expiration below $33.10, as you keep the credit if shares get hit on earnings and fall below $30, and make max profits on a move to $32, making $224 per spread. Shares would have to basically take out October highs to lose money on this trade, an unlikely scenario in my opinion.

Below is graphic display of the strategy:

Furthermore, here is a graphical volatility surface view I created:

AirGas (ARG): Another Blatant Example of Insider Trading

2010-02-05T03:11:00.000-08:00

AirGas shares were trading at $43.70 yesterday and I noted suspicious buying of calls to my clients, here is what I wrote:

Airgas (ARG) is trading 2,750 calls on the day, 20X average volume, due to two large buyers, a buyer of 1,000 April $55 calls, and buyers of 1,500 April $50 calls, offer side action as IV jumps 7% higher, and shares trade down to $43.73. The action is very odd considering the recent gap down on earnings, and must be betting on some type of takeover to take shares more than 30% higher in the next few months. Shares trade 14X earnings and free cash flow, so the valuation is solid, but very interesting bullish action.

Today, AirProducts (APD) offered $60/share for AirGas (ARG). The buyer of 1,000 April 55 calls for 10 cents spent $10,000, a position that will be worth $500,000 today.

Very Interesting

Could Cisco (CSCO) Announce an Acquisition this Week?

2010-01-31T12:04:00.000-08:00

With Cisco (CSCO) set to report earnings this week I am more interested in a potential M&A announcement, as one of the Tech giants sitting on a lot of cash, and looking for growth.

There was suspicious March $10 call buying in Silicon Graphics (SGI) this week as more than 4,000 calls were bought, and it would fit into the Cisco model. On the other hand Brocade (BRCD) is still available and implied volatility began to pick up in that name late last week, another potential target.

Stay tuned...

Alternative Energy (GEX) - Were the Germany Incentive Cuts Leaked?

2010-01-24T06:50:00.000-08:00

On January 12th the Alternative Energy Market Vector Fund (GEX) traded more than 14,000 puts as 7,125 January $27.50 puts were rolled to deep ITM April $30 puts with the GEX trading at $26. The trader rolled $1.25 puts to $4.60 puts, paying an additional $3.35 per contract to get short, a total outlay of $2,386,875.

Since that day the GEX has plummeted from $26 to $23 in just 10 days, falling 11.5% and putting the value of that stake at around $5.35 million. Much of the weakness is attributed to the solar stocks, a heavily weighted sector of the fund, due to the German incentive cuts.

Interestingly enough, the following day, January 13th, Germany announced it's incentive cuts, and France did as well:

http://uk.reuters.com/article/idUKTRE60C4OS20100113

http://www.thestreet.com/story/10660716/1/france-cuts-solar-tariffs-by-24.html?cm_ven=GOOGLEFI

Now life is full of coincidences, but the timing of this near $2.4 million trade that more than doubled due to a news release the following day seems to be a bit more than just a trader having a lucky hand, especially considering that block trade was 40X the average daily volume in GEX puts, a usually thinly traded options chain.

Case Study: Grease Your Palms with Lubrizol (LZ)

2010-01-23T10:38:00.000-08:00

A lot of attention in monitoring options action is devoted to tracking large "block" trades, to follow the large institutional investors, but I have had just as much, if not more, success looking for unusual retail sized action in calls/puts trading in stocks.

A recent case is with Lubrizol (LZ), a producer of a variety of lubricants and chemicals for industrial companies. Here is what I provided to subscribers on January 6th with shares at $75:

Lubrizol (LZ) with an ascending triangle breakout to new highs and call volume is 5X average with offer side buyers on wide spreads in both the February $75 and $80 calls, the uppermost strike. Lubrizol is set to report earnings on February 4th, and unusual call buying has been seen before big pops in the stock a couple times this year. The specialty chemical producer trades 10X cash flow and 4.6X cash value. Lubrizol is an ultimate play on the economic rebound with manufacturing activity picking up, as it's additives are used by industrial firms, and it also provides additives to the oil industry.

I recommend buying the February $80 calls at $1.90.

Here is a chart of the 15 Days of Trading in Lubrizol (LZ) from this recommendation:

Here is a view of the trading in those call options:

Conclusion: Spotting the action in these calls led to an entry at $1.90 and an exit opportunity at $5.50, a sweet 15 day gain of 190%.

Case Study: HR Block (HRB) - Tax This!

2010-01-14T17:27:00.000-08:00

HR Block (HRB) shares gained 3.6% the day before options expiration after multiple Analysts came out with bullish notes, saying the complex tax laws and struggles at Jackson Hewitt (JTX) are likely to be a boost to earnings. Shares closed at $23.07, a 52 week high and look likely to approach a 5 year high at $26. Shares are a fairly good value at 16X earnings, and are always a great play leading up to April tax season.

The interesting story here was the complete mockery seen in the options activity leading up to the Analyst notes today, something that often happens with firms front running recommendations, but a blatant violation in this case.

On 1/5, 15,000 calls traded in HRB, 10X average volume, including a buyer of 2,500 April $23 calls offer side, and chunks of January $22.50 calls offer side, taking open interest to above 7,000 in the January $22.50 calls expiring in just over a weeks time.

That trading is fine with me, maybe some technicians buying the pullback in shares that had broken out.

However, yesterday on January 13th, more than 7,000 January $22.50 calls were bought at the offer of 15 cents with shares at $22.20, new opening orders 2 days from expiring. $95,000 was put into betting on shares climbing in the next 2 days.

Today, those calls closed at 60 cents, and the 13,445 OI remains, greedy pigs looking for more as only 600 contracts changed hands today despite the 300% gain....very interesting.

Abercrombie (ANF): Further to Fall

2010-01-12T15:31:00.000-08:00

Abercrombie has had some of the worst same store sales for months among the retailers, but still rallied a bit, although it has been weak lately.

Today, a trader rolled a massive position from January to February that is looking for at least an additional 12% downside in shares. A 15,000 X 30,000 X 15,000 January $31/$32/$35 butterfly put spread was closed today for $2.02, a trade that was opened on December 8th for a $1 debit, roughly a 100% gain, or $1.5 million.

This trade played out over 1 month with shares falling from $34.65 to $32.40 in that period, and a slight benefit from IV coming in to 44% from 47%. I would say this trader has a good grasp on Abercrombie.

Today, the trader took the full position and rolled it into a February $32/$28 put spread for 15,000 contracts at $1.27, taking $0.75 off the table, or 75% of the initial trade value. However, the trader is still putting a big chunk of money on the line, feeling confident that shares of the teen retailer have further to fall.

The rationale here could be fundamental or technical, with shares trading 18.5X earnings, a PEG of 9.3, and seeing sharp declines in margins and growth rates. On the technical side you can see from the chart below that the 200 day EMA at $30.65 offers some support, but the bigger picture shows that shares have broken below a channel up formed since November of 2008, a $12.50 channel that would imply a move back to the low $20's. The breakdown is confirmed by the recent surge in volume on the breakdown.

Case Study: Omnicare (OCR) Options Action

2010-01-07T19:12:00.000-08:00

On January 6th, OmniCare (OCR) trade 5,200 call options, around 9X daily volume, and almost entirely buyers in the January $25 calls with shares at $24.50, traders paying 20 cents for the call options that expire in 6 trading days. The action was very unusual, but I remember the name being a frequent takeover chatter name, and that the Company is set to present at the JP Morgan Conf. on January 12th, so I figured there was likely something to this action. Shares are also a great value at 10X earnings and 6.5X cash flow.

Here is a view of the larger trades, with almost all the volume occurring from 3:15pm into the close (Chart Courtesy of LiveVol):

Here is a chart of the share price from 3:15pm on the 6th until the close of trading on the 7th, when those same calls were worth $1.10, more than a 400% gain, and the traders held on to the calls.

Now, seeing as traders are holding onto the big gain, there is likely more upside with the JP Morgan Conf. being the catalyst. I would bet shares fill the July 2009 gap to $27, and a 900% gain in the aforementioned call options.

Man, I Love Trading Options!

Alcoa (AA): Trader Remains Very Bullish

2010-01-07T03:45:00.000-08:00

Alcoa (AA) shares were cut to Hold from Buy at Citi this morning with shares touching near $17, more than tripling since March.

One large trader in Alcoa (AA) is staying bullish, as 10,000 February $16 calls were rolled up the 10,000 February $19 calls, taking $1.22 off the table ($1.22 million), and keeping a $360,000 investment in the February $19 calls. The February $16 calls were bought for $1.21 back on December 16th, so the initial investment is off the table and profits are being re-invested into Out of the money calls for a move higher.

Looking at a 5 year chart of Alcoa there is reason to remain bullish as there really is not any resistance until above $20 per share, and commodities are developing as the story of 2010 already due to an major global demand and global economic recovery.

Oil Names Continue to See Bullish Call Activity

2010-01-06T14:46:00.000-08:00

Atwood Oceanics (ATW) big time call buying in March $40's, all offer side. Great bull flag breakout for move from $40 to $50.

Concoco (COP) Jan. 2011 60 call buyer at $2.40 offer for 25,000 contracts

Forest Oil (FST) buyer of 6,000 May $30 calls with shares just below $25. Forest Oil is definitely a natural gas name that could be a takeover target, and is involved in the emerging Granite Wash development. After the XTO deal and Chesapeake joint venture, natural gas plays are hot, and Forest has some impressive assets. Shares are nearing a small cup and handle breakout today, and it looks to be smooth sailing for a move above $30 per share.

The Trade: Get Long Calls in ATW and FST

Case Study: Sierra Wireless (SWIR) Call Action

2010-01-06T03:25:00.000-08:00

The Action: On 12/29 I provided the following to subscribers:

Sierra Wireless (SWIR) shares are up 8.5% on no news and IV is rising 10.5% to 53%. 2,000 calls have traded, 25X average volume, with 70% bought on the offer, a focus on June $7.50 and $10 calls. Shares are breaking out of a bullish flag, and trade 0.57X sales, 2.17X cash, and 5.1X cash flow. The wireless modem provider has great valuation, bullish technicals, and bullish options action.

The Trade: June $10 Calls Priced at $1.55 when the first block of 600+ was bought. Shares of SWIR were upgraded today and the calls will be pricing at least $3.10, a 100% move in 4 trading days with a lot of time to move higher.

The Chart (Courtesy of LiveVol):

Conclusion: Shares still have considerable upside on the weekly bull flag breakout and could run as high as $20 by June. This is a case where small unusual call buying along with a 20% spike in Implied Volatility gave clues to the demand moving into Sierra Wireless, and it is paying off nicely.

Case Study: Alcon (ACL) Call Activity

2010-01-04T03:29:00.000-08:00

Today, Novartis (NVS) Announced it would buy the remaining stake on Alcon (ACL) from Nestle at $180/share. Shares of Alcon closed Thursday 12/31 at $164.35. On November 4th a large bullish trade caught my attention, and the $25,000 trade is now worth $7.5 Million. Novartis' offer for Alcon (ACL) publicly held shares of 2.8 Novartis (NVS) shares is under market value of Alcon shares, so it will be interesting to see where shares trade today.

Here is a look at the recent options activity in Alcon (ACL):

On November 4th I provided the following information to subscribers, shares fo Alcon were at $145 at the time:

Alcon (ACL) options are very active today with 22,000 calls and 6,000 puts trading, 25X average call volume as shares trade for $145 an IV heads lower following recent earnings. Earlier this morning 2,375 each of the December $150 and $155 calls were sold to raise $4.70 per sale and 4,750 February $155 calls were bought at $4.90 for a net 20 cent debit that looks for shares to trade below that level through the end of 2009, but head higher next year. Now, another trade hits with 5,000 February $155/$170 call spreads bought for $3.95, financed from the sale of 5,000 February $130 puts at $3.90, a 5 cent debit. All in all the action looks very bullish for the long term for the Swiss medical giant in which Novartis (NVS) owns a substantial stake, and may look to buy more or all of the company. Shares are pricey on most valuation metrics, and have resistance at $150 on the charts, but could eventually breakout to 2008 highs near $170. The trade makes sense in that way, as shares will likely trade sideways to slightly higher in the coming two months, but have substantial upside potential in 2010 on a potential deal.

The Trade: Long a January $155/$165 Call Spread at $3

The Result: The call spread will close with maximum profits, valued at $10 with shares of Alcon above $165, a 233% gain on the position.

The Chart:

11/4 Trades:

12/2 Trades:

Inside the Numbers: The 5,000 contract Feb. 155/170 Call Spread for 5,000 contracts at 5 cents financed from the sale of 5,000 February $130 puts cost $25,000 and today is worth $7.5 Million

* Charts Courtesy of Live Vol