Tuesday’s Notable Options Activity: $CAT, $EBAY, $MSFT, $PEP, $PG, $XHB

by Dan January 21, 2015 7:13 am • Commentary

Here is some untied, generally directional options activity that caught my eye during Tuesday’s trading:

1. MSFT – in front of this week’s Windows 10 product event there looks to be a decent size seller of long dated calls, likely an overwrite of a long stock position.  When the stock was $46.35 a trader sold to open 15,000 Jan16 52.50 calls at 1.50 to open and bought 420,000 shares of stock.  This trade was done delta neutral  (likely to secure better pricing for the options) and probably was an overwrite of 1.5 million shares of stock.  What’s interesting about this call sale is that the premium received (if in fact an overwrite) would yield more than the stock’s dividend, and additionally would create a total yield of almost 6% when you add to the call premium the stock’s 2.7% dividend yield.  Worst case scenario on an overwrite is that the stock would be called away at 52.50 on Jan16 expiration if the stock at the strike or higher, But effectively the investor would be selling stock at $54  (the strike plus the premium received) which would be up about 16% from current levels.  I detailed this trade last night on CNBC’s Fast Money:

2. PEP – sticking with the overwriting theme, there was an opening seller of 6,000 Feb 101 calls at .54 when the stock was $97. This was likely a long holder overwriting 600,000 shares. If the stock is below $101 on Feb expiration the investor will receive $324,000 in premium, the call-away level is at $101.54, up about 4.5% on Feb expiration.  I am not a fan of PEP’s valuation given their lack of growth and their apparent management of eps growth, from my earlier post, Name That Trade – $PEP: Pepsi Growth Still Challenged:

This is a stock that makes little sense to me on a valuation basis. It’s trading at 20x expected eps growth of 5% on expected sales growth of only 1% (after no growth in 2014). This is a clear example of the company’s nearly $5 billion in share buybacks manufacturing earnings growth.

3. EBAY – saw a bullish roll down when stock was $53.17. A trader sold 7500 April 60 calls at .62 to close and bought 7500 April 55 calls for 1.90 to open.  Total options volume ran 2x average daily with calls making up 90% of the volume.  The company is scheduled to report Q4 results tonight after the close, and the options market is implying about a 4% one day move in either direction.  Given the choice of April expiration I suspect the trader is less interested in the earnings event, and more interested in investors once again focusing on the company’s plan to spin-out PayPal and create a ‘lil shareholder value.

4. CAT – despite the stock being a hair above the 52 week lows, there was a bullish roll in the options market when stock was $84. A trader sold to close 10,000 Feb 95 calls at .12 to close and bought 10,000 Feb 89 calls for .72 open. The company is scheduled to report Q4 results Monday Jan 27th prior to the open, and the options market is implying a one day move of about 3% in either direction, which is a bit shy of the 4 qtr average of about 4%. The implied move seems cheap to me.

5. XHB – the homebuilder etf has had a bad week since breaking out to new 52 week highs last week and promptly failing. The XHB has fared better than its more pure-play cousin the ITB which is down 11% since the failed breakout vs the XHB’s 8% decline.  Yesterday, when the etf was $33.18 a trader paid .47 for 10,000 of the Feb 32.50/30 put spread to open. This trade breaks-even at 32.03 with a max profit of 2.03 if the etf is 30 or lower on Feb expiration.

6. PG – saw a large bullish roll when the stock was 91.30, a trader sold 9600 March 87.50 calls at 4.45 to close and bought 9600 March 90 calls for 2.60 to open. PG reports Q4 on Monday Jan 27th prior to the open, the implied move is only about 1.5% vs the 4 qtr avg of about 1.9%, which seems cheap, especially when you consider JNJ is was down 3.5% at one point following its results yesterday and closed down 2.6%.