Unusual Options Activity Review: YHOO, COCO, STLD, CX, NBR, EP, AXL, CI, .SPXPM

Posted October 6th, 2011 by Joseph Cusick in Unusual Activity

Unusual Options Activity Review For Wednesday, October 5, 2011

Bullish Trading

Yahoo (YHOO) shares rallied Wednesday. In the midday update, we noted that shares were up in morning action after the company said it was sending financial information to private equity firms and other potential bidders. Buyout hopes had helped send shares up 43 cents to $14.89 amid a flurry of options activity. The rally in shares gathered additional momentum in afternoon action after Reuters reported that Microsoft (MSFT) might bid for the Internet giant. At the end of the day, shares were up $1.46 to $15.92. Options volume in Yahoo had surged to 560,000 contracts and 3.5X the daily average. 447,000 calls traded on the Internet company, including heavy trading in October and November 15, 16 and 17 calls.

Bullish trading was also seen in Corinthian Colleges (COCO), Steel Dynamics (STLD), and Cemex (CX).

Bearish Trading

Nabors Industries (NBR) shares rallied $1.10 to $13.42 on a good day for the drillers after crude tallied its best one-day gain since May. With help from bullish weekly inventory data, crude gained $4.23 to $79.90 per barrel. Meanwhile, NBR is now up 21.5 percent from a 52-week low of $11.05 set intraday Tuesday. Wednesday's options volume on the Bermudian oil and gas driller rose to 2.5X the daily average after 14,000 puts and 5,200 calls traded on the stock. The top trades were part of a spread, in which the strategist sold 4,200 Jan13 $10 puts at $2.20 and bought 8,400 Jan13 $5 puts at 59 cents. In other words, $1.02 was collected on this Jan13 10 ñ 5 (2X1) put ratio backspread. If this is a new position, the strategist keeps the credit if shares hold above $10 through the January 2013 expiration and all the options expire worthless. Profits from the backspread are also possible if shares make a substantial move below the $5 strike. However, the 1X2 might also be rolling ñ or closing out a position in the Jan13 10 puts after a 56.2 percent plunge in shares since April. A new position is being bought-to-open in the Jan13 $5 puts.

Bearish trading was also seen in El Paso (EP), American Axle (AXL) and Cigna (CI).

Index Recap

S&P 500 PM Settled Index (.SPXPM) options are beginning to see some interest. Options on the index started trading this week and, in contrast to pit-traded S&P 500 index (.SPX) options, which have a settlement value computed on Friday morning before the expiration, the all-electronic SPXPM has an afternoon settlement. SPXPM options are based off the S&P 500 Index, which rallied 20.08 points to 1,144.03 Wednesday. Meanwhile, 1,673 contracts traded on the SPXPM Index. October 1,200 calls were the most actives. 1,017 traded and some investors seemed to be selling the contract, possibly betting that SPX won't recover beyond 1,200 through the October expiration ñ which is in 16 days for the PM settled index and 15 days for the S&P 500 Index (SPX) options.

ETF Market

SPDR Energy Fund (XLE), which is an exchange-traded fund that holds all of the energy-related names from the S&P 500, added $2.15 to $60.52 after crude oil rose more than $4 and had its best one-day gain since May. Options volume in XLE hit 2X the daily average, with 132,000 calls and 36,000 puts traded in the product. The top trades were part of a ratio spread, in which the strategist sold 28,000 October 63 calls at 92 cents and bought 18,000 October 60 calls at $2.19. It's probably a roll. That is, the investor is selling the Oct 63 calls and giving up hopes for rally beyond $63 through the October expiration ñ 16 days. However, they are maintaining a bullish position in the sector by purchasing a smaller position of at-the-money October calls.

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About Joseph Cusick

Joseph Cusick currently serves as the Senior Vice President of Education and a Senior Market Analyst for optionsXpress. Mr. Cusick seeks out common sense and technologically scalable educational pathways for self-directed investors of all experience levels. He is largely responsible for ramping up delivery of online and offline seminars to customers and potential clients worldwide. Prior to serving in his current role, Mr. Cusick immersed himself in the broker side of optionsXpress by managing his own book of business. Prior to joining optionsXpress, Mr. Cusick served as a market maker and portfolio manager at the Chicago Board of Options Exchange. Joseph is a graduate of Marquette University and holds his Series 4, 7 and 63 registrations with FINRA.

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