Thursday’s Notable Options Activity: $YHOO and $XLI

by Dan December 5, 2014 8:47 am • Commentary

I wanted to quickly breakdown a couple large options trades from yesterday that caught my eye:

1. YHOO – This morning, Bank Of America Merrill Lynch upgraded YHOO from Hold to Buy. Yesterday there was some very bullish options activity yesterday where a trader looked to define a wide range to get long exposure while implementing a good bit of leverage.

The following options trade was in conjunction with selling 500,000 shares of stock at $50.24:

-Sold 12,000 Of the Feb 45 Puts at 1.48 to open

-Bought 12,000 Feb 50 Calls for 3.80 to open

-Sold 24,000 Feb 60 Calls at .87 to open

Structure costs .58

Assuming that the trader was selling the stock to close, this looks like he was replacing a long stock position. The shares greatly outweigh the corresponding delta to the structure, here is how this trade makes money:

Profits:  between 50.58 and 69.42 trader can make up to 9.42 with max gain of 9.42 at $60

Losses: on the downside, between 50.58 and 45 lose up to .58, below 45 lose dollar for dollar.  On the upside losses up to .58 between 50 and 50.58 & between 69.42 and 70.

My Thoughts:  the trader is obviously looking to make a levered bet to the upside, while not too concerned with getting long down about 10%,  while also not too concerned about a extreme upside.  With a little more than 2 months to expiration, the highest probability outcome is that the stock is between 45 and 55 on February expiration and this trade is small winner or small loser. But the trader is likely positioning in front of news about a tax effective spinoff of a portion of YHOO’s remaining holdings in Alibaba.

This is obviously a fairly complicated trade structure as a massive gap down or a massive gap up could render it a loser as the trader is naked short both a put and call and not exactly margin friendly for those who are concerned about such things.  But if you were replacing prior long stock exposure after large gains, this structure offers potentially huge leverage to a 20% move with a minimal premium outlay.   Worst case scenarios stock down 10% below $45 or above $69.42, up 38%


2. XLI – Options volume ran hot yesterday at 5x average daily volume. Most of the volume in short dated puts. When the etf was about $57 yesterday a trader bought 25,000 of the Dec 56 puts for .49 or $1.2 million in premium to open, break-even on this trade is down about 2.5% at $55.51.  Also right before the close, when the etf was a bit higher at $57.06,  a trader bought 5,000 of the Dec 56.50 puts for .57 to open.

What’s interesting about this trade to me is that for one, this is a fairly short dated bet It could be protection against industrial holdings but given the performance (or lack thereof) of some of the large components of the XLI and the relative cheapness of options on XLI, this could be an outright bearish bet.

The chart below is of 30 day at the money implied vol (the price of options in blue) vs 30 day at the money realized (how much the etf is actually moving ini white) which shows the relative cheapness to owning options if you thought there was a potential for increased short term movement:

From Bloomberg
From Bloomberg

I highlighted this trade on CNBC’s Fast Money last night: