BBY, HPQ, XLF Options — Unusual Trading Activity — May 25, 2012

| May 25, 2012 | 0 Comments

Unusual Trading VolumeThis week we’re going back to take a look at some very unusual options trading activity in Best Buy (BBY), Hewlett Packard (HPQ), and the Financial Select Sector SPDR ETF (XLF).

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:

Best Buy Options (BBY)

Options on consumer electronics giant Best Buy (BBY) lit up our tracking system Monday morning with a large amount of trading activity.

It was a new week with a new list of earnings announcements on deck.  The first mega company scheduled to release earnings this week was Best Buy, who announces earnings Tuesday morning before the open.

Even though the market is up nicely, BBY is only trading up a few pennies at $18.20.  The stock’s clearly underperforming its peers.

As a result, option traders are jumping all over this by buying put options.

Right out of the gate, one option trader came in and purchased 5,500 BBY June $16 put options.  He paid an average price of $0.40 a share for a total cost of $220,000.

Keep in mind this trade is a simple put purchase.   This strategy is used when an option trader believes a stock is going to decline in value.

In addition, buying these options without pairing them with any other options leaves traders with unlimited profit potential.

Personally, I like this trade.  It’s a simple, inexpensive play on BBY declining in value.

As you know, Best Buy is the largest US consumer electronics retailer.

Aided by the 2009 acquisition of 50% of Carphone Warehouse’s retail operations, the firm now controls around 7% of the $700 billion global consumer electronics market.

They also operate a warranty company.  Its “Geek Squad” helps to differentiate consumers’ shopping experiences by increasing their ability to access technical support.

So, why the large put activity?

On the surface, this company seems like a strong company… but they do have headwinds.

For instance…

Mass merchants, warehouse clubs, and online retailers are all vying for electronics retail market share.  Moving forward, this will lead to increased price competition as well as limit margin expansion opportunities.

In addition, Best Buy is having a difficult time usurping cable providers, iTunes, and Wal-Mart’s proprietary brands for market share in the direct-to-consumer media content distribution.

So, it comes down to this…

Best Buy is having a tough time competing in the market for their services and products.

Technically, the stock has broken down below three key support levels, and option traders believe it’s going even lower.

I think that pretty much says it all.

Option traders believe in further declines, and they’re usually right more often than they’re wrong.

Hewlett Packard Options (HPQ)

Options in computer device maker Hewlett Packard (HPQ) are showing large options activity.

With earnings season winding down, there are still a few big companies yet to report.  One such company is Hewlett Packard.   They’re scheduled to report Wednesday after the market close.

So today, we’re looking to see how option traders are positioning for HPQ.

It looks like they’re a bit bearish.  In other words, traders are looking for a move to the downside.

Even though the market is slightly in the green, HPQ is trading down a few pennies at $21.72 a share.

And already, one option trader has come in and has purchased over 3,500 put spreads.

He purchased the HPQ May $21 strike put options for $0.33 and sold the HPQ $20 strike put options for $0.17.  This resulted in a total cost of $0.16 a share.

Buying a put spread is a bearish options strategy.  It’s used when a trader believes the underlying stock is poised to move lower.

The strategy involves buying one put option and selling another put option on the same stock at a lower strike.  Since we’re buying a higher priced put, this position is done for a slight debit.

In this case, the trader’s making a smart and inexpensive bet that HPQ is going to move lower.

He’s spending a total of $45,500 to create his position.  If HPQ trades below the short strike of $20 before May expiration, the trader will make a profit.  The profit will be the difference of the strikes minus the amount paid for the trade.

On this trade, the maximum profit potential is $0.84 ($1.00-$0.16) per spread.  Since the trader bought 3,500 put spreads, he could pull down a total profit of $294,000.

Not bad for a few days work!

But why a play on Hewlett Packard moving lower?

As most of you know, Hewlett Packard is a leading provider of information technology products and services to businesses and consumers worldwide.

With the recent EDS acquisition, HPQ’s services will constitute about one third of consumer technology sales.  That’s similar to personal computers at 30%, but much higher than printers, which account for 20% of revenue.

But here’s the real truth… I think this large put activity goes deeper that just analysts’ expectations for upcoming earnings.  HPQ has some serious headwinds ahead of them.

The PC business is facing declining yearly revenues.  And substitute technology products are squashing optimism for the expected short-term acceleration of PC refreshes.

In addition, data center giants like Cisco Systems (CSCO) are eyeing HP’s traditional markets as opportunities to steal market share.   And increased competition could bring additional margin pressure for HPQ.

Bottom line… HPQ may look strong now, but it’s obvious that option traders believe that could change in the very near future.

Financial Select Sector SPDR Options (XLF)

Options in Financial Select Sector SPDR ETF (XLF)are trading enormous volume this Thursday morning.  Our tracking system just keeps lighting up with put buyers.

Option traders are concentrating their buying on a specific June strike.

What’s more, since the Volatility Index is down, traders aren’t paying a lot of money for premiums today.

In early trading, XLF is flat at $14.07 a share.

The largest volume is on the XLF June $13 strike put options.  These contracts have already traded an eye-popping 220,000 contracts this morning.  The price paid was an average of $0.13 a share.

Remember, straight put buying is a strategy that’s used without any other options when traders believe a stock is going to see a large decline.

I think this is hedge funds and large institutions hedging against their large bank positions. 

And when you think about it, this makes perfect sense with all the negative news focusing on the banks.

JPMorgan Chase (JPM) and its multi-billion dollar hedging loss, as well as Morgan Stanley (MS) with its botched Facebook (FB) IPO.

In addition, with Europe still very unstable, it’s obvious option traders are positioning themselves for a rocky next few weeks in the banks.

So, why the $13 strike options?

XLF hasn’t been able to trade above $16 a share in over a year.  Now, with a market correction in progress, XLF has dropped from $15.60 to $13.80 in just under two weeks.

And if it breaks below the 200-day moving average at $13.73, XLF could easily plunge right through the $13 level.

Now it’s no secret that option traders are coming in by the busloads.

So there’s no doubt these option traders are negative on the banks. 

Obviously, they don’t think it’s out of the realm of possibility that with another leg down, these options will increase in value.

As we’ve heard many times before, there can’t be a sustained market rally without bank participation.

And it’s clear this trader certainly agrees with this statement.

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

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Category: Unusual Options Trading Activity

About the Author ()

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank of New York.