Options Flow Summary and Unusual Activity Alert: General Sentiment, Pacific Ethanol Inc (PEIX) and Cheesecake Factory Inc (CAKE)
General Sentiment
It has been a mixed morning in the markets, with an early rally fading and broad averages currently off º%. Financials are outperforming the market as investors cheer the news related to a Chinese capital stake.
The CBOE VIX continues to slide, currently near 21.80, as traders look ahead to the slow holiday week. Volume is strong in the final few days of December options trading and is on pace for a 14 million contract day.
Pacific Ethanol Inc (PEIX)
The average daily options volume in this name is less than 2,500 contracts. However, it has spiked recently, with 6,900 contracts changing hands yesterday and another 7,400 contracts changing hands today.
Yesterdayís flow was bullish, with 5,290 calls trading and a focus on new positions in the Jan-08 5 and 7.5 strikes. Most of that activity occurred when the stock was trading near $7.58.
Today, the stock is up 20% to $9.29 and the bullish flow persists. Buyers of the December 10 calls are paying from a nickel to $.40 for a total of 1,700 contracts so far.
With only 2 days left to expiry, these buyers may be locking in gains from short call positions or protecting themselves in case of a takeout. Stock is difficult to borrow right now, suggesting a short-squeeze may also contribute to the upside potential.
Cheesecake Factory Inc (CAKE)
We are also seeing unusual bullish options volume in CAKE, a subject of occasional takeover chatter. The stock is up nearly 9% to $24.08 from the 52-week lows hit earlier this week. Options volume is currently 19 times recent average levels. Virtually all of the flow involves calls, with buyers leading the flow.
Whether bottom-fishing or looking for another catalyst to lift the stock, we have seen aggressive buyers in the Dec 22.5 strike and January 20 through 25 line. As the stock has lifted from an opening near $22.19, the Jan 25 calls have been trading from $.25 to $1 with implied volatility lifting from 40% to 50% in the contract. ISE data confirms much of the buying activity is from customers creating new open interest.
Posted By: Trade Alert
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About Henry Schwartz
Henry Schwartz has traded derivatives on US and European exchanges for nearly 20 years. His experience includes market-making and institutional trading at the Hull Group, Salomon Brothers, Bear Stearns and most recently Banc of America Securities, where he led the electronic market-making project coincident with the launch of the ISE. His current work involves real-time stream analysis of options market activity for a number of leading institutional sell-side firms.
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