The largest trade in the options market so far today (single stock, etf or index) is an opening sale in JP Morgan (JPM) calls. Shortly after the open and when the stock was $67.29 an investor sold 50,000 of the Aug 67.50 calls at 1.92. I suspect a sale of very near the money calls like this is an overwrite against 5,000,000 shares of stock. An overwrite of this nature would make sense if the investor thought the stock could have limited upside over the course of the summer and would be happy to have their stock called away modestly higher, effectively at $69.42, up about 3% (the strike price plus the premium received), while also building in a buffer to the downside of about 3%.
We have discussed options selling on many occasions in the past on the site, and an obvious rule of thumb is to do so when options prices (implied volatility), are high relative to the underlying’s past history, or possibly the broad market. In the case of JPM, 30 day at the money implied vol (blue below) just saw an uptick, while realized vol (how much the stock has been moving) has remained at the lows of 2015, possibly tempting the vol seller a tad:[caption id="attachment_54287" align="aligncenter" width="600"] JPM 1yr chart of 30 day at the money IV vs 30 day realized vol from Bloomberg[/caption]
Unlike most of JPM’s banking peers, on top of re-testing its pre-financial crisis levels, the stock is now making new all time highs. Does the call seller possibly see a double top, dating back to 2000?[caption id="attachment_54288" align="aligncenter" width="600"] JPM 20 year chart from Bloomberg[/caption]
As usual we have no idea what the intent of such a trade is, and what it is against. But potential yield enhancement with the expected buffer makes a lot of sense. The options were reported sold, and vol ticked down after the options printed, so its fairly clear the options were sold. Obviously an at the money purchase of this size with a breakout above the all time highs would be fairly bullish, but again, it doesn’t appear that way.
I would also add that last week we detailed a fairly tight overwrite in very good size in CSCO (read here) and with the broad market unable to breakout, and possibly nearing correction mode, we could see a lot more of this activity in well owned stocks that investors don’t want to sell, but like the idea of potential yield/ mild protection in the near term.