There were a couple interesting rolls, one bullish and one bearish that caught my eye today in the options market.
First in Twitter (TWTR). The stock has had a pretty healthy run since declining almost 5% on February 11th, the day following what investors viewed to be mildly disappointing Q4 results. Since making a new all time intra-day low Thursday morning at $13.91, the stock is up about 25%!
Today when the stock was $17.20 at 10:30 am, a trader sold to close 11,000 of the March 24/29 call spread at .03, its was basically worthless, and bought to open 11,000 of the June 21 /26 call spreads, paying 91 cents to open, or about $1 million in premium.
This trade breaks-even up at $21.91 on June expiration, up about 27% from the trading level. What’s interesting about the trade is that the upper strike of the call spread is at the Nov 2014 IPO price of $26, not particularly an optimistic strike, but as a shareholder I’d be happy to see the stock at $26 in 4 months.
A quick look at the chart shows the fairly steady downtrend of lower highs and lower lows. It’s been getting a bit more fierce since the massive gap last spring. If the stock could get a head of steam, and get through the sharp downtrend, a close above $20 could be in the stock’s near future.
Sentiment in the stock is fairly downbeat, with short interest near 10% of the float. Wall Street analysts remain downbeat with 14 Buy ratings, 25 Holds and 2 Sells, with an average 12 month price target of $21.
Earlier today in CC’s post on T-Mobile (TMUS) he referred to a large trade in the market, that seemed to be rolling a defensive positioning for an existing holder.
Shortly after the open, when TMUS was $36.71, a trader bought to close 25,000 Feb 38 calls for 55 cents, and sold to close 20,500 Feb 36 puts at 30 cents. This was likely a collar.
But with the stock up post earnings, and just two trading days to Feb expiration, the trader sold to open 25,000 May 36 calls at $3.35 and bought to open 25,000 May 31 puts for $1. So let’s break this new trade in May down.
My assumption is that this collar is against 2.5 million shares of stock. Let’s use the price of $36.70. The May 38 / 31 collar was executed for a $2.35 credit.
If the stock is below $38 on May expiration, then the trader will take in $5.875 million, but will also have gains of the stock up to $38, or $1.30.
If the stock is $38 or higher the trader would have their stock position called away, but would have effectively sold it at $40.35 (the short call strike, plus the premium received for the purchase of the collar).
The $2.35 credit received for the collar will also serve as a buffer to the downside, in this case the trader would have protection on their 2.5 million shares of stock down to $34.35 (the current price less the $2.35 premium received). Between $34.35, the trader would have losses, down to $31, the level where the put protection will kick in.
So to do a little math, on May expiration, the max loss the trader can lose on their 2.5 million share holding is $3.35, or $8.375 million, with the max potential gain of $3.65, (the difference between current price of $36.70, the short call strike $38, and the $2.35 premium received), or $9.125 million.
I guess the most important part of this trade is that it immediately makes money, with gains capped up 10%, while providing an immediate buffer.