Here is some untied, generally directional options activity that caught my eye during Tuesday’s trading:
1. IWM – I know you already know this, but the Russell 2000 severely lagged the S&P500 (SPX) in 2014 (up only 3.5% vs its large cap brethren up 11.5%). I know that you also already know that while the SPX marched to new high after new high in 2014, closing at the very highs on the last tick of the year, the Russell 2000, as measured by the IWM for our purposes seemed trapped in a fairly tight trading range for most of 2014, spending most of its time between $110 and $120. There were no shortage of market pundits who labeled this underperformance as a sure sign the broad market was topping. Well, once again the index is threatening a breakout, and if and when it does, the move could be fairly epic!
It appears that one market participant is playing for a breakout expressing the view with options, with yesterdays action either defining a tight range for gains above $120 by March expiration, or more likely chose to roll up a prior bullish view. When the IWM was $118.13 in the morning, it was reported that the March 120 / 124 1×2 call spread was crossed 20,000 by 40,000 for 76 cents. Notice how it did not say bought or sold, and both options blocks printed at or above the offer. If this was a ratio call spread it could have been closing on the 120 calls, as they were marked closing, and there was 20,000 open interest in the strike. This is a great example of how sometimes it can be very hard to delineate unusual options activity. But I suspect this was a bullish roll, where the trader sold 20,000 March 120 calls at 2.14 to close, and bought 40,000 March 124 calls for .69 to open. Closing out a likely profitable trade for a total of $4.3 million in premium and committing $2.76 million of it that breaks-even up at $124.69 (or about 5.5%) on March expiration in a little more than a month. Either way the trader is playing for a breakout either in a range between $120.76 and $127.24 (for the ratio) or above $124.69 if a bullish roll.
A breakout of the Russell would show a healthy broadening out of the bull market. Could the Russell be on the mend?
2. XOP – on a day that saw a sharp decline in crude, (down almost 4% at its lows, settling in down 3%) equities shrugged off the weakness, with the SPX closing up 1%. This has sort of bifurcation has not been the case for most of 2015. The S&P Oil and Gas etf saw a large opening bearish trade when the XOP was 49.
3. RIG – Credit Suisse downgraded the stock yesterday morning to a sell and set a $12 price target, suggesting that the company will cut their dividend that currently yields 15% (clever). When the stock was $19, a trader rolled down and out a bearish view, selling 16,000 Feb 18 puts at .
4. A – Agilent, the semi and bio-medical equipment testing company saw a bullish roll when the stock was $39.23. A trader closed a bullish risk reversal, selling 19,500 Feb 42.50 calls at .32 to close, and buying back 13,000 Feb 37.50 calls for .48 to close. And sold 15,000 August 35 puts at 1.77 to open and used the proceeds to buy 15,000 of August 42.50 / 50 call spreads for 1.67. This trade resulted in a 10 cent credit to the buyer, with the worst case scenario being the trader is put 1.5 million shares of stock at $35, down almost 11% on August expiration. The trade breaks-even on the upside at $42.50, with profits of up to $7.50 between $42.50 and $50, with the max gain of $7.50 above $50 (plus the 10 cent credit), up almost 25% from current levels.