Thursday’s Notable Options Activity: $CSCO, $JNJ, $JPM, $PMCS, $SMH, $XLU

by Dan February 13, 2015 7:11 am • Commentary

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

1.  CSCO – shares closed up nearly 9.5%, after reporting strong fiscal Q2 earnings and giving forward guidance that was more upbeat than expected.  Total options volume ran almost 5x average daily with calls outnumbering puts nearly 3 to 1.  The two most active strikes on the day were the March 28 and 30 calls, with close to 50,000 trading of each.  The largest trade of the day was a bullish roll shortly after the open when the stock was $29.26, a trader sold 25,000 March 28 calls at 1.54 to close and bought 30,000 March 30 calls for .40 to open, rolling up a prior bullish view.  Shortly before the market close there was a closing seller of 19,000 March 28 calls at 1.67 when the stock was near the highs of the day at $29.47.  In my CSCO preview (read here) on Monday I suggested:

For those looking to play for a beat and raise, and a breakout above the prior highs, the Feb13th weekly 28 calls at .32 seem dollar cheap (stock ref $27.25).

With the stock closing yesterday at $29.46, with one day to weekly expiration, those calls closed at $1.46, a great example of the benefits of defined risk leverage when it works out.  The stock has rallied $2.20 since Monday, and this weekly call is now worth 4.5x what it was on Monday.  Obviously long stock would have been more profitable (100 shares vs 1 call), but here is the thing, the break-even was at $28.32, up 4%, and if you were to have bought those calls you needed to get a lot of things right to just be in the game, most importantly direction, then magnitude of the move, and timing of the move is always imperative when dealing with weeklies.  So I don’t bring this up to demonstrate any particular skill, the options looked dollar cheap for those who had conviction that the stock would outperform the implied move to the upside, this week.  There are a lot of scenarios where owning the stock was more attractive than owning weekly calls, but none of them played out this week, so difference between the gains of owning stock vs out of the money calls can be chalked up to risk management.

I will add one more point, the stock which trades below a market multiple and for the first time in 2 years posted double digit earnings growth in a quarter, is approaching what could be an epic breakout level at $30:

CSCO 15yr chart from Bloomberg
CSCO 15yr chart from Bloomberg

 2. XLU – The utilities etf had its lowest close in almost two months, now down 2.4% on the year, and down 8% from the all time highs in late December.  The sector went from best performing, to the worst in the S&P 500 in one fell swoop. There was a large bearish roll in the XLU yesterday when it was $45.95, a trader sold to close 40,000 March 47 puts at 1.90, and bought to open 40,000 June 44 puts for 1.52.  Regular readers know we have on a bearish trade in the XLU (New Trade – $XLU: Utility Playa) in March expiration that has quickly become a winner with the sectors 5.5% decline in the last week or so, and we will be looking to book a profit in the coming days (possibly this morning) on further weakness as it will become near term oversold close to $45.

3. SMH – saw bearish flow, when the Semiconductor etf was $55.64, a trader paid 1.03 for 45,000 March 54 puts.  These break-even at $52.97 down almost 5% on March expiration.  Whats interesting about the choice of strikes is that the etf, which INTC makes up 18% of the weight, has rallied 7.5% in the last two weeks bouncing off of important technical support at $52:

SMH  6 month chart from Bloomberg
SMH 6 month chart from Bloomberg

4. JNJ – a trader rolled an overwrite (short call against long stock for yield enhancement) out and down, when the stock was $98.45 a buyer paid 13 cents for 66,500 April 110 calls to close and sold to open 66,500 July 105 calls at 1.26, making the call away level $106.26 up 8% on July expiration.  If the stock is at or below $105 on July expiration the investor will collect $8.38 million, adding 1.3% in yield to its existing dividend yield of 2.8%.

5. JPM – saw a large roll of an overwrite (short call against long stock for yield enhancement), when stock was $59.69 a trader bought to close 49,000 April 57.50 calls for 3.30 and sold to open 61,000 April 60 calls at 1.81.  The call-away level is now $61.61, fairly tight with stock hovering below $60.

6. PMCS – the networking semiconductor stock saw some very unusual call volume yesterday, equalling more than the existing open interest. There were a couple bullish rolls up and out, first right before 1pm when stock was $9.18, a trader sold to close 10,000 Feb 7 calls at 2.15 and bought 10,000 Jan16 10 calls for 1.00 to open.  And in the afternoon when the stock was $9.19 a trader sold to close 8000 Feb 8 calls at 1.20 and bought 11,500 Jan16 calls for 1.00 to open.