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Dial Up Level 3’s Options

Recent options activity points to this call trade idea


Level 3 Communications (LVLT) is a communications services company that has made some poor merger acquisitions in the past and is looking to improve upon those old mistakes with new leadership.

The company recently elected former COO Jeff Storey to run the company. With this transition, Level 3 is hoping to make some fast improvements to help lower its large amounts of debt and earn some revenue. To accomplish the latter, it plans to spread its presence by reaching to different markets around the globe. The acquisition of Global Crossing in 2011 has proved to be a much better bet than the smaller companies LVLT had originally acquired in the past.

Hedge fund Caxton recently released its quarterly filings, and one of its biggest new holdings is in LVLT; it’s possible Caxton is looking to see some growth in LVLT by way of a larger global presence as well. Also, Level 3 Communications Director T. Michael Glenn had participated in recent insider buying, purchasing 5,000 shares at $21.10 for $105,493 — a promising show of confidence.

In recent news, Level 3 Communications will be participating in the industry’s CommunicAsia conference in Singapore, which begins today and runs through Friday. This might mean we could hear an important announcement about new technologies for LVLT.

Also, Level 3 has recently announced the expansion of a new partnership with the company Dafiti, a large e-commerce online retailer located in Brazil. Dafiti wants to improve the shopper experience through the help of Level 3’s content delivery service. The online retailer is a booming business for Brazil and has had a large amount of growth when compared to other e-commerce fashion market companies.

LVLT is looking to spread into the U.S., too. The Spanish-language Estrella TV network has selected Level 3 to broadcast its station through the use of its Vyvx solutions broadcast services. LVLT will deliver Estrella’s content through 40 affiliate stations and will be gaining millions of new viewers by way of this system. Level 3 also was selected to broadcast the UEFA final throughout the U.S on Fox.

Recently, Standard & Poor’s raised Level 3’s debt rating to a “B,” as the Global Crossing acquisition appears to be helping LVLT’s debt leverage.

The ‘Institutional Trade’

On May 6, a trader bought 19,735 Sept 24-29 bull call Spreads and sold the Sept 19 puts and paid a 75-cent debit. Let’s break down this trade:

  • Their Risk: $1,975 per 1 lot
  • Their Reward: $425 per 1 lot
  • Their Break-even: $24.75
  • Cash Outlay: $1,480,125

On June 13, a trader bought 1,200 LVLT Sep 22 calls for $1.65.

  • Their Risk: $165 per 1 lot
  • Their Reward: Unlimited
  • Their Break-even: $23.65
  • Cash Outlay: $198,000

Since all the unusual options activity has been bullish for September, I want to place a risk-vs.-reward trade in September.

My Trade

Buying the LVLT Sep 24-26 call spread for 53 cents.

  • Risk: $53 per 1 lot
  • Reward: $147 per 1 lot
  • Breakeven: $24.53

Greeks of this Trade:

  • Delta: Long
  • Gamma: Long
  • Theta: Short
  • Vega: Long

A Note on Our Process

We define unusual option activity as large block trades that represent a large percentage of daily option volume. The block trade is considered “unusual” if the option volume is above the average daily volume over the past 22 days. At, we scan and analyze order flow from all of the major options exchanges to identify any unusual option activity.

Analyzing unusual order flow gives traders a window into the positions of large institutional players. The majority of unusual option activity can be traced back to hedge funds, mutual funds and other large institutions. Knowing where these institutions are placing their bets can be advantageous for any trader, as they have informational and technological advantages the average trader doesn’t have, and the amount of time and analysis that goes into every one of their trades is substantial. We offer this service through our seven-hour daily live trading room or through our Premium Twitter feed with all entries, exits and unusual options activity tweeted all day long.

However, order flow can be deceiving sometimes. One might logically think that a large buyer of calls is bullish on the underlying security. This is not always the case. Remember that many participants in the equity options market are hedgers. Long calls are a hedge against short stock, and long puts are a hedge against long stock. With this in mind, we have developed a seven-step trading plan that helps filter out unusual option activity that will not provide actionable trade setups. It is by using this plan that we are able to identify the most significant unusual options activity trades every day.

As of this writing, Keene was long the LVLT Sep 22 Calls, Sep 24 Calls, Sep 25-29-33 Call Butterfly and Dec 28 Calls.

Article printed from InvestorPlace Media,

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