Anatomy of a Trade – $QCOM – Dig for Fire

by CC April 9, 2015 3:16 pm • Education

Yesterday Dan wrote about a large trade in QCOM options:

Shortly before noon there was an interesting trade that caught my eye. When the stock was $67.50 a trader sold 20,000 Jan 60 puts at 2.72 and bought 20,000 Jan 70 calls for 3.52, paying .80 for the package.  This trade breaks-even on the upside at 70.80, and on the downside at 60.80.  If the stock is between 70 and 60 on Jan expiration the trader losses 80 cents, or $1.6 million in premium.  At 60 or below the trader is put 2 million shares and suffers corresponding losses.

We assumed this was how this trade played out because this is how it was reported from brokers on the floor of the Amex where the trade was crossed:

QCOM jan60 puts sold 20k @ 2.72 jan70 calls paid 3.52 for 20k

This morning on Twitter we got a question asking about the QCOM print because a different website reported it as a different trade:

We’ve written about this issue before but it bears repeating. Unusual options activity is often a little opaque and not 100% reliable for a number of reasons. Even from us, as Dan recently pointed out in trying to get to the bottom of a JPM trade last month:

The fact that I had to spend a decent amount of time trying to figure this out highlights why options activity isn’t so black and white.  I can honestly say that while I have seen this trade reported by a more than a couple services as a bullish roll it doesn’t look like a slam dunk that it actually was. We see this on Twitter a lot during the day where activity is blatantly mis-reported (in a lot of cases by people that want to believe the flow is reinforcing their existing position). And sometimes it creeps into more official services. And sometimes despite a lot of effort to get to the bottom of things we even get it wrong. So be careful out there!

So what actually happened here in QCOM? Based on the look we got we think it was the way we reported it. But you can never be 100% sure. Why would others report it differently?  To answer this question I think it makes sense to breakdown how a large order like this with considerable delta exposure gets filled.  First a customer, likely a large hedge fund, goes to a market maker or a bank who is in the business of providing liquidity, collecting bid/ ask and commission.  In this case the market received the bid/ ask on two legs of the trade, and commission on 40,000 options that was likely anywhere between $70,000 and $120,000. Not a bad business if you know how to hedge out the risk in the trade.

So the question of whether the trade was bought or sold often arises when market participants go back and look at what was printed on or near the bid and the ask. If an option printed on the bid, it was usually sold, and if an options printed on or near the offer it was usually bought.

But, often a trade that needs to be hedged to such a large extent will be presented on the floor and those market makers will start hedging ahead of the print in an attempt to not get run over after the trade goes up. So what can happen in those instances is the stock can move a little bit before the print and therefore look a little off on the screens when it does finally print (skewing the closeness to bid/offer of the aforementioned sides of the trade).

That could have been the case here, where it would look like the calls were sold and not bought. Or maybe they were sold. Sometimes the reports from the floor are deliberately misrepresented, as those representing the order don’t want reports of the order to go out to the the entire world while the customer is still actively looking to add to their view. Like I said, you never know 100%. But we think this is how it played out.

I would add one more thing. The idea of collaring the stock at $67.50 (which is what the trade was if it was not how we reported it) by selling the Jan 70 call and buying the Jan 60 put seems like an odd way to add protection or to make an outright bearish bet given how much closer the call strike was to the price of the stock vs the put, and given how far out the choice of expiration was.

Last month the company  announced that they have massively expanded their share-buyback program, committing to buying $10 billion worth of stock in the next 12 months, nearly 10% of the current market cap. That call is awfully tight if it was a sale against a long.