Unusual Options Activity Review: Wells Fargo (WFC) and Hewlett Packard (HPQ)
General Sentiment
US markets started out in positive territory on Tuesday but nosedived at midday on negative comments from ATT and persistent jitters in the financial space.
The S&P 500 index ended down 26 points or 1.86% and the CBOE VIX closed up 1.71 at 25.52, indicating a significant demand for options and a premium expansion that is typical on downside moves.
Close to 20 million contracts changed hands yesterday, providing the first record volume day of 2008. Puts led calls overall by a substantial margin of 1.5 to 1.
Wells Fargo WFC
A massive Wells Fargo put spread was crossed on the ISE just before noon yesterday in what may be a closing vertical put spread in January options. In this trade, a net credit of $4.20 was received 140,000 times ($58.8 million) to sell January 32.5 puts against buying January 27.5 puts.
At the time of the execution the stock was at $26.95. However, a print of 7.3 million shares of stock at $27.55 on Nasdaq suggests the trade was tied to a hedge to remove the sizeable delta risk from the trade.
Open interest at both strikes is above 140K, and the trade history shows buying activity in the 32.5 puts last summer. Those purchases were in the $1.50 range when the stock was near $34.00. WFC has not escaped the credit crisis and hit a 52 week low today near $26.37.
Hewlett Packard (HPQ)
We saw unusual volume in Hewlett Packard options on Tuesday, with notable buying of the Feb 45 calls for $1.65. Total volume in HPQ was triple the recent average levels.
ISE sentiment data confirms much of the buying activity was driven by opening customer transactions. This was possibly in anticipation of a rally as the February earnings date approaches. However, the actual earnings release date is currently expected to be post-expiry.
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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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