Profit From Unusual Option Activity in MRVL

Marvell Technology (MRVL) saw huge and unusual option activity on Wednesday, with over 43,000 calls trading versus average daily call volume of only 3,500 contracts. Notably, 11,474 contracts traded in the November $9 Weekly calls that expire this Friday.

With MRVL stock closing at $8.62 yesterday, buyers of the November Weekly calls need a 4.4% move in the stock over the next two days just to get in the money, with a 6% move needed to get to break even.

MRVL stock has been struggling lately, to say the least. On Oct. 27, PricewaterhouseCoopers resigned as auditor, causing the stock to drop to $7.55. Since then, MRVL has been grinding higher, now above the $8.20 resistance level, with the next upside target of $9.00.

MRVL Stock Chart

MRVL

MRVL has been the subject of takeover chatter several times in the past, with nothing materializing to date. As a specialty chip maker, Marvell is positioned in an industry that has been ripe with deals recently, such as Skyworks’ (SWKS) acquisition of PMC-Sierra (PMCS).

More importantly from a trader’s perspective, the big and aggressive call buying may portend to a MRVL deal in the offing. The implied volatility on these calls shot up sharply, moving from 53.66% IV on Tuesday to a 93.31% IV on Wednesday, which is a definitive sign that the call buyers were motivated.

While the stock rose 7 cents on Wednesday, these November $9 Weekly calls, which have a 32 delta, rose 11 cents, outpacing the gain on the stock. Normally these calls would have risen only 3 cents, but the enormous call volume drove the price of these options to a relative extreme.

So, for aggressive traders looking to sell heightened short term volatility and hedging with stock, a covered call trade fits that scenario.

I would look to buy MRVL stock and sell the MRVL Nov $9 Weekly calls that expire tomorrow for a net debit of $8.61. This positions 68 deltas long (100 delta long stock less 32 delta call sale) and captures the 8-cent edge (0.94%) on the calls being sold.

Ideally, MRVL stock closes higher than $9 on this Friday, with the position effectively being closed at $9.00 for a 4.5% two-day gain. If not, then I would look to sell more call options next week against the stock to further reduce the cost basis.

As of this writing, Tim Biggam had no position in the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can e-mail Tim at tbiggam@deltaderivatives.com.

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