AET, DOW Options – Unusual Trading Activity – January 25, 2013
This week we’re taking a look at unusual options trading activity in Aetna (AET) and Dow Chemical Company (DOW).
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:
Aetna Options (AET)
Option activity on health care benefits company Aetna has turned bearish today. One trader expects the shares to fall to at least $36 by July.
AET is currently trading for $49.45 per share. The stock is up 44% from the 52-week low of $32.29 and currently just below the 52-week high of $50.29.
After a big rally over the last five months, the trader is expecting AET to reverse course at resistance of the previous 52-week high. The trader bought 4,000 July 2013 $43 puts for $1.11 and sold an equal amount of July 2013 $36 puts for $0.24.
The trade cost the trader 87 cents per spread and he bought 4,000 of them. That’s a $348,000 bet on AET falling to at least $36.
He’ll breakeven on the trade if AET is trading for exactly $42.13 when the options expire in July. That’s nearly a 15% drop from current levels.
The maximum profit for this trade is about $2.5 million. But in order for them to get the most out the trade, AET needs to fall below $36 by July. That’s a 27% drop in the stock price.
Is this a good trade?
The trader is obviously expecting a big correction in AET’s stock price in the next few months. And looking at the long-term chart of AET, it’s not out of the question. $50 is not only a 52-week high, it’s also the stock’s high water mark in 2006 and in 2007. The stock briefly broke out above this level only to come crashing down in 2008.
This is clearly a very sound technical trade with a good risk/reward. But in order for it to work, the technicals will have to outweigh the company’s strong fundamentals and broad market that’s been on fire lately.
Dow Chemical Company Options (DOW)
A trader bought a huge bull call spread on Dow Chemical Company (DOW) yesterday. They’re expecting DOW to break out to a new bull market high by next January.
DOW is currently trading for $34.70. The shares are up 27% from the 52-week low of $27.18 and are just below the 52-week high.
A trader bought 44,700 January 2014 $40 calls for 76 cents apiece and sold an equal amount of the January 2014 $45 calls at 15 cents apiece. Each spread cost the trader 61 cents and he bought 44,700 of them… that’s a $2.7 million bet on significant upside in DOW this year.
In order for the trader to break even when the options expire, the trader needs DOW to rally 17% to $40.61. The trade maxes out if DOW soars 30% to $45 or more by next January. If it does reach $45, the trader will pocket a cool $18.9 million!
This trader is clearly bullish on DOW. But in order for a massive $41 billion market cap chemical company to make this type of move, they need the entire global economy to heat up this year.
And there’s a good chance he’s right…
Right now economic data from the US, Europe, China and many other emerging markets is showing improvement. If this trend continues, it will likely fuel a strong rally in DOW as well as other cyclical stocks.
One thing’s for sure, this trader is going to bring in a whole lot of cash if DOW hits $45 by next year.
More Options Ideas…
That wraps up this week’s unusual options trading 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
