by Alex Hanson | January 23, 2012 12:43 pm
Friday was the first round of quarterly options expirations this year, and traders seemed to be taking advantage of increased volume to place some forward-looking bets. More than 20 million option contracts traded during the session, a moderate increase from January’s average volume of 17.4 million.
While the lion’s share of this activity consisted of settling out of expiring options, there were a number of bullish trades of interest as well.
Bank of America
Bank of America (NYSE:BAC[1]) was among the top-five most active optionable stocks on Friday, with nearly 300,000 calls and puts changing hands. About 60% of this volume was on the call side, and most notable was the March 7-strike call option, which saw more than 21,000 contracts trade, including one early-morning block of 7,500. This block traded for 46 cents apiece, or $345,000 in all (7,500 contracts times 46 cents times a factor of 100).
Based on the option pricing, it appears as though traders were buying these calls, suggesting they expect upside in the shares through the next couple of months (March expiration occurs on March 17). Breakeven for this long bet is $7.46, or the strike price of seven plus the 46 cents paid to buy the option. On Friday, BAC closed at $7.07, meaning the shares need to rally over the short term to make this trade a profitable one. The most the traders can lose (excluding commissions) is 100% of the premium paid to buy the calls.
Citigroup
Citigroup (NYSE:C[2]) also saw a lot of activity in its options pits,with 120,000 calls changing hands along with 75,000 puts. A popular choice for option buyers was the March 35-strike call, which saw total volume of nearly 17,000 contracts during the day. About a half-hour into the trading session, a large block of 12,000 contracts traded for 28 cents per share.
It appears as though this trade was the work of call buyers as well, but Citi will have to labor for this trade to be profitable by expiration. In order to be worth anything at March expiration, the shares need to rally above the strike price of 35, which is an 18% advance from current levels. Again, the most the trader can lose when expiration rolls around is the premium paid for the call. And of course, the trader can opt to sell out of his option position at any time between purchase and expiration to take profits off the table or cut losses.
Lowe’s
Option bulls also took an interest in Lowe’s (NYSE:LOW[3]) but took a longer-term approach. Even with the stock trading down almost 3% in Friday’s session, the January 2013 20-strike call was wildly popular, as 25,000 contracts changed hands on open interest of 2,576. This means the day’s volume was nearly 10 times higher than the existing options in place at this strike price.
Two blocks of 12,500 contracts traded around 3:15 p.m. on Friday and were bought for $11.60 apiece. Doing the math, that means the blocks were each worth $14.5 million each!
LOW is trading around $26.50, so these 20-strike options already have $6.50 in “intrinsic value,” which is the stock price minus the strike price (or the amount by which the option is “in the money”). The remaining premium is “time value,” and the price of this time value is relatively high because the options don’t expire until next January.
Breakeven for this long-term trade is $31.60, or the strike price of $20 plus the premium paid. If LOW is trading above this level when the options expire in about a year, the trade will be profitable. It’s possible that bullish LOW investors actually viewed the stock’s pullback as a buying opportunity, jumping in on a modest pullback to get a slightly better price.
Source URL: https://investorplace.com/2012/01/3-big-bullish-option-trades/
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