Heavy Options Activity with Earnings

by Jay Pestrichelli on February 7th, 2012

After Coinstar (CSTR) announced last night and blew away earnings, I am again reminded of the tell tale sign that someone thought big news was coming. As a reminder of our blog post back on October 25th about US Steel (X), options can give signals to what leveraged money is thinking about.

Yesterday the call options for had an unusual amount of volume at the 50 strike, in fact the, 6500 contracts traded was more than the 4,500 open interest. A similar picture evolved on the put side at the 50 strike as well with 4,000 contracts being traded vs. the 2,300 open interest.

Like our article said back in October, these volumes can be a head fake on the direction, but for sure they tell us that someone is expecting a move.

This morning, there will be more earning announcements and a few of them have some notable options volume vs. their open interest.

Martin Marietta (MLM) had a little notable volume at the 85 strike on both the put and calls side. 867 calls on 208 OI and 562 puts on 62 OI. This is still low volume, comparatively, but it does exceed the OI.

Perrigo (PRGO) had 1600 call contracts trade on the 90 strike vs. 173 OI. Still a low number of contracts, but over 9 times OI is worth taking not of AND that there is no real volume on the puts.

Solar Winds (SWI) had an extraordinary amount of volume on the call side, most notably the 25 strikes. There were 26,700 contracts traded on an OI of only 7,900. The 32.5 and 37.5 strikes also had more volume than OI. Looking back, the last two earnings had large gap up surprises. However yesterday’s price action told a different story. The stock opened at an annual high of 36.99, but sold off to close at 33.27. Should be interesting to say the least.

Last, is Toyota Motors (TM). Its really not much to note, but the 82.5 calls had basically no OI, yet traded 537 contracts. The stock has been moving up steadily recently and apparently, someone has an idea it will move more. For 0.11 cents, I can see why someone might take a shot at an upside move with such a small amount of cash. It seems to be moving there anyway.

Most of these are what we would consider speculative trades and although they involve options aren’t really defensive hedges. However, as we talk about in Rule #4: Unleash Your Inner Guru, we do recognize the idiosyncratic bets investors will take from time to time. At Buy and Hedge, we would simply use this data to help us understand what the money in the options market is telling us. There’s nothing wrong using this options data as an indicator. Just be sure to track how you do reading the tea leaves.

Happy Hedging!


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