Unusual Options Activity Review: TRGT, ATVI, RSH, IR, KOG, OSG, NVS, LUV, .VIX, .SPX, XLF
Unusual Options Activity Review For Monday, December 12, 2011
Targacept (TRGT), a Winston-Salem, NC biotechnology company, added 31 cents to $7.79 and options on the stock were actively traded for a second day. Friday, one player initiated a May 17.5 ñ 30 call spread on TRGT for 75 cents, 10000X. Monday, the same spread traded again. In this play, the strategist apparently bought 5,000 May 17.5 calls on the stock for $1 and sold 5,000 May 30 calls at 20 cents. Therefore, an 80-cent net debit was paid for the TRGT May 17.5 ñ 30 call spread (excluding transaction costs). It's a bold play because the first leg of the spread (the 17.5 calls) is about 125 percent out-of-the-money. TRGT has a 52-week high of $30.47 set in March of this year. However, the stock came under pressure and plummeted more than 60 percent on November 8 after a trial of one of the company's antidepressant treatments showed disappointing results. The spread trading in the stock Friday and Monday seems to reflect some expectations that shares will recover some or all of the losses through May 2012.
Bullish trading was also seen in Activsion Blizzard (ATVI), Radio Shack (RSH), and Ingersoll Rand (IR).
Kodiak Oil and Gas (KOG) gave up 30 cents to $8.88 and put options on the Denver-based energy company were actively traded Monday. Total volume on the stock was approximately 11,000 puts and 2,235 calls. January 7.5 puts, which are 15.5 percent out-of-the-money with 39 days of life remaining, were the most actives. 7,411 traded and 91 percent traded at the asking price, suggesting buying interest. Another 2,425 March 7.5 puts changed hands. Meanwhile, implied volatility in the options on the stock increased by 13.5 percent to 77, as some players were apparently buying to take new positions in puts with a 7.5 strike in KOG on concerns about losses in the stock in the weeks ahead. Some shareholders might be buying puts to hedge recent gains in KOG. Shares are up 107 percent since October 4.
Bearish trading was also seen in Overseas Shipping (OSG), Novartis (NVS), and Southwest Airlines (LUV).
CBOE Volatility Index (.VIX) saw unusual action Monday. The market's "fear gauge" typically moves higher when stock market averages fall because it tracks the expected or implied volatility priced into S&P 500 Index (.SPX) options. Monday, however, the S&P 500 Index lost 18.72 points to 1,236.47 and VIX moved lower as well. The volatility index dipped .71 points to 25.67 and closed at its lowest levels since October. The decline in the VIX in the face of relatively volatile market conditions might reflect expectations for the future. That is, investors are "pricing in" the prospect of more orderly trading heading into the seasonally quiet period of late-December. In addition, the last five trading days at yearend and the first two days of the New Year often see a period of strength ñ sometimes called the Santa Claus rally on Wall Street.
Analyzing the ETF Market
A substantial four-way spread trades in the SPDR Financial Fund (XLF) Monday. Shares, which hold all of the financial-related names from the S&P 500, lost 31 cents to $12.79 and one strategist sold 106,000 December $11 - $13 put spreads on the ETF at 42 cents and bought 106,000 January $11 - $13 put spreads for 62 cents. They paid 20 cents for the package and are likely rolling a position out an additional month. That is, they are closing out a position in December 11 ñ 13 put spreads before the contracts expire at the end of the week. They are also bracing for additional declines in the financials and opening a new similar spread in the January puts.
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