Chart of the Day – $TSO: Rolling in Oil

by Dan June 20, 2014 3:37 pm • Commentary

One of the most interesting themes as it relates to unusual options activity over the last month has been the bullish flow in energy related names. In our daily unusual options activity post Too Many Options and in Quick Hits, we have highlighted some of this flow:

From June 19th:

KMI –  there was a fairly large out of the money call spread (bought to open) in pipeline company Kinder Morgan (KMI), where a trader bought 40,000 of the Jan 42.50/47.50 call spreads for .25 (bought the 42.5c for .28 and sold the 47.50 calls at .03) when the stock was $34.75, with a break-even at 42.75, up 23%.  The trade risks $1 million in premium to make $19 million if the stock is $47.50 or higher.

From June 17th:

WMB – Williams rose to a new all-time high, up 19% on the day, after WMB agreed to buy control of Access Midstream and look to increase its share of the U.S. energy infrastructure market.  WMB had seen active call buying volume over the last couple of months, and it was payday for many options buyers on the big move.  Surprisingly, the only real seller was someone getting out of the Jan15 50 calls around 7.30 midday.  That line traded over 12k by the end of the session.  There is over 500k of open interest in WMB calls (vs. only about 115k in the puts).

From June 9th:

APC – very bullish trade when the stock was $103, there was a seller of 5,000 Aug 97.50 puts to buy 5,000 Jan15 120/135 call spreads

From June 4th:

MRO – Buyer of 25k of the Oct 38 calls for 0.86 in the morning.  $38.18 is the 5 year high in MRO, and the all-time high of $40.70 is only a bit more than 10% away.  Implied vol hit a multiyear low over the past month, heading into the mid-teens.

From June 3rd:

COP – Buyer of 15,500 of the July 85 calls for 0.22 in the morning.  COP hit a new all-time high in May, and is now up 12.5% year-to-date.  COP’s next earnings report will be after July expiry, so the buyer of the July 85 calls is making an out-of-the-money bet with no clear catalyst (currently known by the market at least).

You get the drift. Lots of call buying with break-evens at levels above 52 week or all time highs.  Today was no different with a very bullish roll in the refinery space, TSO. When the stock was 60.83 a trader sold 13,000 of the November 57.50 calls at 6.30 to close and bought 19,000 of the August 62.50 calls for 2.27 to open, making the Aug calls the single largest line of open interest.

Looking at the 5 year chart of TSO below shows a very impressive breakout recently (red line) and the break-even on these calls up almost 8% which corresponds with the prior all time highs from early last year:

TSO 5 yr chart from Bloomberg
TSO 5 yr chart from Bloomberg

This trader obviously has some profits in the trade, and is rolling up the premium but it is important to note that while he is risking less of the profits, he has dramatically shortened the duration of the trade and the probability of profitability by moving the break-even higher.  The reason for this may be the fairly dramatic decline in volatility in the overall market and in TSO specifically.  The out of the moneys purchased in August which will also capture the company’s Q2 results could benefit from not only rising stock price but a bump in vol on the slightest bit of M&A chatter:

TSO 3 yr chart of 30 day at the money IV from Bloomberg
TSO 3 yr chart of 30 day at the money IV from Bloomberg

I have no opinion on the stock, and in the space for that matter, but with the rising sentiment towards oil due to new unrest in Iraq, and the flurry of call activity resulting from takeover speculation and restructuring potential I am not inclined to chase most names near all time highs, even-though options prices look very attractive.