Wednesday’s Notable Options Activity: $CBS, $DLTR, $NAV, $WMB

by Dan February 12, 2015 7:38 am • Commentary

Here is some interesting options activity that caught my eye during Wednesday’s trading:

1. CBS – Last night on CNBC’s Fast Money I detailed what was unusual call activity in CBS, a day after than their subsidiary Comedy Central announced the departure (later this year) of Jon Stewart, the long time host of the channel’s hit, The Daily Show. Watch here:

Total options volume ran 8x average daily volume, with calls making up 90% of the activity on the day prior to Q4 earnings after today’s close.  The options market is implying about a 3% one day move which is a tad higher than the 4 qtr avg of about 2.8%.  There were a couple trades that my caught my eye, one appeared to be closing a prior bullish view while the other seemed to be a trader taking the view that options prices are cheap.  First when the stock was $56.85 shortly after the open, a trader sold 20,000 of the March 57.50 / 67.50 call spreads at 1.57 to close and bought 800,000 shares of stock.

The trade that I described on the show was one where the trader bought to open 12,000 Feb 57 calls for 1.23 to open and sold 600,000 shares of stock at just below 57.  This trade could have been one of two things.  First it could have been stock replacement, as the trader wanted to define their risk into a potentially volatile event, so sold the stock to close and now has a break-even up at $58.23, up 2.5%.  In this scenario if the stock is below $57 on next Friday’s expiration, the trader would lose $1.47 million in premium, but that is the max risk.  On the chart this looks like a decent play for a breakout on the slightest bit of good news:

CBS 1yr chart from Bloomberg
CBS 1yr chart from Bloomberg

If the trader is taking the view that options prices are cheap, and thinks the stock could move more than the implied move over the next week and half, then the trader is looking for an outsized move on earnings in an effort to capture the difference between the losses or gains in the options by the movement in the stock, or vice versa depending which way the stock moves.  Implied vol looks fairly reasonable given the volatility environment we are in and the way single stocks have been moving post earnings:

CBS 1yr chart of 30 day at the money Implied Vol from Bloomberg
CBS 1yr chart of 30 day at the money Implied Vol from Bloomberg

2. DLTR – shares the of the dollar store have ripped almost 10% to new all time highs as they won out in their efforts to acquire Family Dollar, out-dueling Dollar General who was also attempting to buy FDO.  Shortly before the close, when the stock was $76.58 there was a buyer of 40,000 of the August 85/95 call spreads for 1.90 to open.  This trade breaks-even on August expiration at $86.90, up 13.5% with a max gain of $8.10 at 95 or higher, up 24%.  For a stock that was trading at $55 in October, this seems like a fairly aggressive buy, not to mention the stock isn’t exactly cheap, trading at 21x expected growth this year of 15%.  I have no idea what the synergies will be with FDO, but that stock, with the acquisition premium built in is trading 28x an expected 9% earnings decline this year, with expected sales growth of only 3%.

3. NAV – one trader either sees lower lows, or looking to protect their holding in the truck maker which is already down 17% in 2015, having made fresh 18 month lows yesterday. When the stock was 27.95 a trader sold to close 9600 April 32 puts at 4.60 to close and bought to open 12,000 July 29 puts for 4.00.

4. WMB – on Tuesday in this space we highlighted some very bullish call activity in the stock from the prior day:

WMB – saw a large bullish roll when the stock was $46.50 a trader sold 48,000 Feb 45 calls to close at 2.45 and rolled up some of the profits by paying 1.08 for 66,000 Feb 48 calls to open. That is closing out nearly $12,000,000 in premium and committing $7 million of it that breaks even up at $49.08, up another 5.5% in less than two weeks. The company is scheduled to report Q4 results February 18th after the close. The options market is already implying about a one day move of which is well above its 4qtr avg move of only 2% and the 8 qtr avg of about 3.5%.

Yesterday saw more bullish activity, when the stock was 47.44 a trader bought the Feb 47/49 1×2 call spread 20,000 by 40,000 for even money.  If the stock is between 47 and 49 on Feb expiration (next Friday) the trader can make up to 2 with a max gain of 2 at 49, with the profits trailing off between 49 and 51.  The trader would be short above 51.  This could be a very nice yield enhancement/leverage trade for a holder of 2,000,000 shares of stock.

Also when the stock was 47.20 there was a bullish risk reversal purchased, the trader sold to open 10,000 Jan16 40 puts at 3.40 and bought to open 10,000 Jan16 52.50 calls for 2.74 to open, with the trader collecting 66 cents for the package.  The worst case scenario is the trader is put 1,000,000 shares of stock at 40 on Jan16 expiration, less the 66 cents in premium collected. Between 40 and 52.50 the trader collects the 66 cents, or $660,000 in premium.  Best case scenario stock is above 52.50 and the trader collects the premium and has gains above the call strike.