ADBE, DISH, FRX Options — Unusual Trading Activity — June 22, 2012
This week we’re going back to take a look at some very unusual options trading activity in Adobe Systems (ADBE), Dish Network (DISH), and Forest Laboratories (FRX).
As many of you know, unusual options volume can be a valuable indicator as to what traders are thinking, and more importantly, where these stocks are heading in the short-term.
This is something professional options traders pay a lot of attention to, and for good reason…
Unusual options activity can “tip off” big moves in a stock, either up or down.
So let’s take a look at some ‘interesting’ activity that caught our eye this week:
Adobe Systems Options (ADBE)
Options in software maker Adobe Systems (ADBE) showed a huge amount of trading activity Monday.
Even though the broad market is relatively flat, it’s discouraging because the news that traders were looking for did come out of Europe over the weekend.
So, it’s not surprising that our tracking system is showing large put buying in what has become a volatile name.
Earnings season is already ramping up again. Europe is still dealing with their issues. And domestic housing data this morning was mediocre at best.
In turn, we now need to hope for some good earnings news out of big names like Adobe.
However, revenue missed expectations in the first quarter of 2012. And it seems at least one put buyer expects similar news when the company reports second quarter earnings after the bell tomorrow.
In early trading, ADBE is flat at $32.33 a share.
But right out of the gate Monday, a trader came in and purchased about 2,000 put spreads on Adobe. First he bought the ADBE July 32 puts for $1.30, and then he sold an equal number of ADBE July 29 puts for $0.40.
Volume exceeded open interest at each strike, indicating that a new position was initiated.
Let’s remember… when buying a put spread, the maximum profit is the difference between the strike prices minus the amount paid for the spread.
So, since this trade cost $0.90 a share, it can earn a maximum profit of 233% as long as ADBE closes at or below $29 by July expiration.
Not a bad potential pay-off!
So, the question is, why so much negativity around this name?
It’s not too hard to understand really.
You see, large tech companies like Google (GOOG), Facebook (FB), and Microsoft (MSFT) are promoting HTML5. It’s a web programming language that could quickly replace Adobe products and accelerate the demise of Adobe’s Flash as the standard for media delivery.
Adobe’s creative solutions are mature products. If they want to stay in business, ADBE has to offer attractive new features to entice users to upgrade regularly to the latest release of the flagship Creative Suite products.
Furthermore, the company is also now subject to headline risks. For instance, there are security vulnerabilities in the Flash product. As such, the product has become a preferred vehicle for hackers to gain unauthorized access to users’ computers.
Lastly, and most importantly, Apple (AAPL) has named Flash as the primary reason Mac computers crash.
I think these vulnerabilities are exactly what options traders are betting on here.
Dish Network Options (DISH)
Options in satellite TV provider Dish Network (DISH) experienced a large amount of unusual trading activity right at the end of the day Monday.
We’ve finally got a little market rally going. And the tech sector may once again lead the way.
As you already know, some big tech names like Qualcomm (QCOM) and Research in Motion (RIMM) have been beaten down over the last few weeks.
However, DISH has remained in the middle of its trading range. The stock’s been fluctuating between $26.50 and $27.50 since June 1st.
This is important to note. You see, experienced option traders look at these technicals in order to come up with their trades.
In this case, a single put trader dominated the option activity in Dish Network. Apparently, he wasn’t concerned the stock remained stagnant at $27.60 a share.
This trader swooped in a sold 7,400 contracts of the DISH August $27 put options for an average price of $1.40 per share.
In doing so, he collected premium payments of $1,036,000.
Remember, put selling is a bullish trade where an option trader needs the stock to stay at or above the strike price by expiration.
And that’s exactly what this trader is expecting. As long as DISH remains above $27 a share by August expiration, he’ll walk home with over a million dollars in cash!
But it’s a big gamble during this rollercoaster type market… So, why DISH?
For those of you who don’t know, Dish Network serves 13.9 million customers in the United States via a network of owned and leased satellites.
DISH has also purchased a wireless spectrum covering the US that it may use to provide wireless telecom services in the future. And this could indicate a possible partnership with an existing carrier.
But this is only half the good news on DISH…
Thanks to DISH’s low-cost platform and focus on efficiency, no other cable or satellite company has been able to match its prices.
In addition, other than the NFL Sunday Ticket package, DISH offers the vast majority of the most popular content available on DirecTV. There’s little reason DISH shouldn’t hold its own in the battle for customers moving forward.
And lastly, DISH has been willing to experiment with new technologies… a key attribute given the change the TV industry is likely to experience. For instance, DISH has partnered with Google on its television efforts.
For all of these reasons and more… I think this trader knows he has a good thought premise.
And as a result, he’ll be rewarded handsomely!
Forest Laboratories Options (FRX)
Options in pharmaceutical giant Forest Laboratories (FRX) started to light up our tracking system late Wednesday.
Forest Labs is hovering at the top of its trading range, and at least one investor is looking for a rally to ensue. In fact, options activity in FRX over the last week has been about 3 times more than average.
What’s going on?
The company’s getting ready to release earnings on July 16, 2012.
And with volatility on a sharp decline lately, option traders are starting to position themselves early. You see, the lower the volatility, the less expensive options cost. As a result, large option traders can pick up big blocks at cheap prices.
And one option trader clearly wants to take advantage of the situation.
Just before the close Wednesday, our radar picked up a block trade of 1,500 contracts of the FRX July $34 call options. They traded at an average price of a mere $0.15 a piece.
With the stock closing the day at $34.55 a share, this is certainly a speculative play. However, this trade has nearly five weeks until expiration, plus an earnings announcement in between.
So, even though it’s a long shot, it could definitely wind up paying off in a big way.
But why trade a lesser known name?
If you don’t already know, Forest Labs is a pharmaceutical company focused on in-licensing drugs for development.
The company has a strong focus on central nervous system drugs, including antidepressant Viibryd, Alzheimer’s drug Namenda, and fibromyalgia drug Savella.
In addition, FRX predominantly sells drugs in the United States while maintaining a small presence overseas.
Now, is this trader out of his mind by hoping for a rally in Forest?
The short answer… I don’t think so.
Here’s why…
The company’s Alzheimer’s drug Namenda is one of only two drugs approved to treat this deadly disease. And Forest is expected to have a semi-monopoly on the drug over the next couple of years. You see, competitor clinical trials on new Alzheimer’s drugs have largely failed.
What’s more, Big Pharma has been exiting the primary-care drug business in order to focus on specialty disease drugs. This trend has lessened competition in the primary-care markets and is potentially supplying Forest with drugs bigger companies no longer want to pursue.
Lastly, FRX has a rock solid balance sheet with no debt and a ton of cash. And in this market, a strong financial position provides a real competitive edge.
Bottom line… FRX has a lot going for them. And I believe this call position is a very smart play.
More Options Ideas…
That wraps up this week’s unusual options trading activity and volume…
Keep in mind, there’s a lot more unusual options activity going on than what we discuss here.
We just try to bring you what we feel are the most significant ones– and the ones you might actually be able to make some money on!
So keep an eye on your email inbox… we have a lot more options trading ideas coming your way!
Safe Trading,
Marcus Haber
Category: Unusual Options Trading Activity
