MorningWord 6/24/15: Carbo Loading – $CRR

by Dan June 24, 2015 9:36 am • Commentary

Regular readers know that we are not fans of trading off of unusual options activity as a sole input as observers of said activity rarely have the full story of why an option was bought or sold, whether it was opening or closing, or if traded against, stock, otc options or as a hedge (read more on the topic here and here).  There are obviously lots of potential moving parts, and rarely is it as clear cut as merely a bullish or bearish outright view being expressed. But that doesn’t make it useless taken as a whole.

One sort of tell of directional activity can be a roll, when a trader closes out of one option and rolls the view out in time and or in price.  On Monday I got the following email from a reader (Paul):

Hi Dan!  Question:
CRR traded an enormous amount of call options on Monday especially when compared to its prior open interest. Take a peek at the volume, please. If you have a comment I would appreciate your thoughts.
The JUL 45 traded hugely especially when compared to its prior open interest of 90 of the 45 calls.
Here was my response:
Hey Paul, it looks like yesterday an opening buyer, as you mentioned, of the July 45 calls, 2000x, paying between 1.45 and 1.80 when the stock was between $44.02 and $44.72.  
It looks like the trader rolled out of the July 45 calls, selling them to close, 2,000 at an avg of 2.475 and bought to open 2500 of the July 47 calls for 1.55 when the stock was $46.25. Wow short interest is 36%, I have never looked at the name, thanks for bringing it to my attention.
This clearly looks like short term bullish trading. Here was the activity from Monday, per Bloomberg:
Between 1:05 pm and 1:20 pm there were 3 blocks of CRR July 45 calls bought (avg price $1.64), the increase in IV (implied vol) indicates they were bought. And the first print trading on the ask likely implies the same, and the increase in open interest from 60 contracts (coming into that day) means they were opening.
Ok, now lets look at yesterday’s activity, per Bloomberg:
 At 12:39 pm yesterday two blocks of 1000 July 45 calls were sold to close at an avg of 2.475 when the stock was $46.25. This is clear to me as the options were marked closing, IV was down, and the first print traded on the bid and the 2000 contracts was equal to the open interest coming into the day. Not a bad trade, it appears that the trader made 84 cents on 2000 contracts in one day, or about $167,000.And here is the part that shows a certain level of continued commitment to the bullish thesis. When the trader sold the July 45 calls, they rolled the position up to the 47 strike in July, paying 1.55 for 2500, or about $387,000 in premium, more than twice the profit from the prior days trade.

As I said to Paul in my email, I had never heard of Carbo Ceramics Inc (CRR), a $1 billion market cap oil and gas services company based in Houston, but the options activity has certainly put in on my radar. And the 36% short interest is definitely of note when you consider the stock is down 70% from its 52 week highs made last July. And while many oil and gas companies are saddled with debt, CRR is not, they have $96 million in cash on their balance sheet and only $75 million in debt.

And lastly, that chart looks like a coiled spring, having based for the last couple months just above $45, holding its 50 day moving average which is rising (purple line) and above its 200 day moving average (yellow line) for the first time since late July when the stock was north of $120:

CRR 1yr chart from Bloomberg
CRR 1yr chart from Bloomberg

While short dated options prices are far from cheap with 30 day at the money IV at 46%, they are far closer to the 52 week lows than the January highs:

CRR 1yr chart of 30 day at the money IV from Bloomberg
CRR 1yr chart of 30 day at the money IV from Bloomberg
The next identifiable catalyst will be Q2 earnings in late July, this is a situation where unusual options activity sparked a potential trade idea. I am not sure running out and just chasing the activity makes sense without a broader framework, but its a good start and is one of the main reasons to track unusual options activity.