Yesterday shortly after the open I highlighted in Quick Hits a large block of short dated puts that were bought on Mosiac (MOS):
Dan: MOS seeing some opening put buying,when stock was $52.58 a trader paid .54 for 5,000 April 50 puts to open. The stock is 3.5% off of the 52 week highs made last week, but still up 13% on the year. They are not expected to report earnings again until early May missing April expiration
This trade struck me as curious because of its size as the stock only averages about 5,000 options traded daily, and there is a little less than 100,000 total open interest.
Today, with the stock down nearly 4%, those puts have almost tripled in value, now in the money, worth about 1.50 with the stock $49.90. Not bad for a day’s work.
Regular readers know that we generally track unusual options activity more to get a feel for sentiment on individual names, sometimes as an input to a broader theme, and rarely as a reason to trade.
This is a good example where the put purchase was likely a long holder adding some protection given the lack of identifiable catalysts and the fact that MOS ain’t exactly popular with the trading types.
A quick look at the two year chart shows that the stock had just recently filled in the massive 30% gap from mid 2013, possibly proving overhead technical resistance:
I would add one more point, that the 1 year chart below of 30 day at the money implied volatility (blue line) vs 30 day realized vol (white line, how much the stock is moving) was at a very tight spread, making the premium paid on the options look relatively cheap vs the stock’s movement:
Here is a situation where the buyer not only got the near term timing very right, but also scooped some cheap vol. So when we have people ask us how do we chose what strikes, expirations and vol levels for directional options, trades, the factors listed above have a lot to do with it. April implied volatility is up 2-3 points today, adding to the gains of the trade from the delta position.
We generally like to spread directional trades to alleviate the issues with being long premium. But every once in a while you’ll see us do an outright purchase when vol is super low. The thinking behind that is that we’d prefer to leg into a spread after (hopefully) getting the initial direction correct when vol is low.
The trader who nailed this trade yesterday now has a ton of options he/she could sell to lock in some gains or alleviate the premium still at risk. For instance, the April 47.5 puts can already be sold at the same price as the April 50p purchase, which would mean a riskless position with the potential for a 2.50 payout. Not bad.