We use this post to highlight unusual activity, especially what we perceive to be directional. We don’t suggest that this activity can be useful in making any investment/trading decisions about the underlying (i.e. blindly following the trade). But we highlight it as it helps us gauge sentiment, or gets us looking at a particular name.
Here is a great example of trying to glean too much for such options activity. With Deutsche Bank down 7% I thought it made sense to take a look at U.S. bank stocks and see what sort of flow there was in the options market. The two largest trades of the day in the sector were in June 14 puts of Bank of America (BAC), both opening, with the larger, the earlier one reported on the ask, suggesting they were bought. But…
… as you can see above, the first print of 7500 (that traded at 89 cents when the stock was 15.38) was on the ask. But the second print at 11:42 am was on the bid, when the stock was lower at $15.34 and the calls printed at a lower price of 84 cents. This clearly indicates that the puts were sold, as there was pressure on them in volatility terms despite the the stock going lower (which should have increased their value). I called an institutional options broker who saw the order and they were in fact sold, tied to stock. This was NOT directional, an opening seller of VOL. This is EXHIBIT A why you can not just trade off of initial reports of unusual activity.
One thing is for sure though, with BAC nearing $15 this could be testing a technical inflection point, having been recently rejected at the downtrend from late 2015. It’s currently sitting on support at $15, with next line of defense the uptrend from the 2016 lows:
OK, now to some call activity in the S&P Financial Select etf, the XLF. This looks directional, but again, who knows what it was against. When the XLF was trading $19.18 shortly before noon a trader sold to close 25,000 Oct 20 calls at 5 cents and bought to open 25,000 Oct 19 calls for 45 cents. These calls now break-even at $19.45, up about 1.5% from the current trading level. With the recent spin-out of reit stocks, the XLF is pretty much a pure play on banks, insurance and credit card companies. Nearly 50% of the weight of the XLF will report in Oct expiration, which makes the in the money aspect of this roll intriguing. This could be an outright bullish bet, but it could be by a great trader or a horrible one. It could be stop against a short position in the etf, or maybe a hedge against a basket of short banks. Who knows.
What I do know though looking at the charts, much like BAC, which is a 6.5% weight of the XLF, the chart is sitting on support near term at $19:
And longer term, from the single digit lows in 2009, a re-test of that uptrend is $17, with the 2016 low of $16 the last line of support below the 2012 breakout of $14:
So one thing is nearly certain, if DB goes in a death spiral, 30 day at the money implied volatility for the XLF at 17.6% will be deemed to be very cheap: