Regular readers know we don’t place too strong of emphasis on unusual options activity. Without intimate knowledge of the trade, or knowing the initiators’ intent, whether the trade is outright, or delta neutral, or what it may be against, it is nearly impossible to place any significance to large trades aside from maybe a sentiment gauge relative to open interest or a change in flow. We generally use unusual options activity as an input in our idea generation process, usually a starting point to take another look at stock or etf.
For instance yesterday, there was an opening three legged trade in JP Morgan (JPM) that caught my eye. When the stock was trading $79, a new all time high, a trader sold 6,500 Nov 81 calls at 40 cents ($260,000 in premium), and bought to open 6,500 of the Jan 85 calls for 95 cents ($617,500 in premium) and bought to open 6,500 June 90 calls for $1.39 ($903,500 in premium). This looks like a fairly bullish trade, where the trader sold some slightly out of the money calls that expire this week to help finance some out of the money calls in Jan that break-even up at $85.95, nearly 9% from the trading level, and also some well out of the money, long dated calls in June, where those calls break-even up at $91.39, nearly 16% from the trading level.
Now let me add my two cents, this could be exactly what it looks like, a trader buying 2 different upside call strikes in uncharted territory for JPM. But if we can agree that the Nov 81 calls were sold at 40 cents ($260,000 in premium), and that the Jan 85 calls were bought for 95 cents ($617,500 in premium), then it might make sense to consider that the June 90 calls (that were reported to be bought for $1.39, and $903,500 in premium) might actually have been sold, still resulting in a bullish position, that would have resulted in a nearly identical premium received than what was spent on the Jan 85 calls. If this was the case, then on Friday’s close, if JPM is below 81, the Nov calls will expire worthless, doing it’s job to help finance the Jan call purchase, while the June is so far out of the money the trader thinks that on a continuation of the move in the coming months, the decay will help offset the increase in deltas of the short strike.
The larger point is trying to decipher unusual options activity is more of an art than a science and we think it makes sense to tread lightly when it comes to making your own investment/ trading decisions on big prints!
Lastly, there are few companies that hold as much importance for the broader market than JPM has. Its 2008 high near $50 served as formidable technical resistance for years until its mid 2013 breakout to new highs, establishing a new range between $50 and $70 and then this past week’s parabolic move higher:
Your guess is as good as mine where this thing stops, but investors are clearly pricing in a regulatory, interest rate, deal and trading environment (consensus is for a 4% eps and sales bump in 2017) in the new year that continues to justify JPM’s price to book value above 1 (an industry high) nearing levels not seen since Sept 2009:
Lastly, JPM CEO Jamie Dimon’s name was in the news this week as someone in Trump’s transition team floated him as possible Treasury Secretary. It’s funny because he was one of the single largest beneficiaries of the financial crisis bailout. Bailouts that are still be used to fuel populist anger years later, including in Trump’s run. But the Wall Street/Washington revolving door is alive and well, it’s just not Dimon. Reports say the swamp will be drained by giving the job to a Goldman Sachs alum.