CNX, SLV, BBY Options — Unusual Trading Activity — August 24, 2012
This week we’re going back to take a look at some very unusual options trading activity in Consol Energy (CNX), iShares Sliver Trust (SLV), and Best Buy (BBY).
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:
Consol Energy Options (CNX)
Options in coal and natural gas company Consol Energy (CNX) showed heavy activity late Friday afternoon as the S&P 500 refused to give up its gains for the week.
It seems like no matter what data rears its ugly head, this market won’t be pushed down. The bears just can’t take the S&P below the crucial 1,400 level.
This theory was tested by at least one trader on Friday afternoon in CNX.
As CNX traded down 0.75% to $31.95 a share, our detection grid showed a single block trade of 3,000 put contracts.
The interesting thing was that all 3,000 put options were sold… not bought. This trader was clearly making a long-term bullish bet that Consol Energy is pretty much done dropping for the rest of the year.
Our tracking system picked up his trade of 3,000 CNX January $29 strike puts at an average price of a whopping $2.48 per share. That’s a total premium collected of $744,000.
Now, all that needs to occur is for Consol Energy to stay above $29 a share by January expiration and to the bank this trader goes.
So, let’s take a closer look at CNX…
For those who don’t know, Consol Energy produces coal and natural gas.
Consol’s coal mines are mostly located in the Northern and Central Appalachia, the Illinois Basin, and Utah. And their natural gas wells are also spread across a wide swath of Appalachia.
In 2011, CNX mined about 63 million tons of coal and pumped about 153 billion cubic feet of natural gas.
So why does this trader believe the stock is done falling?
First off, coal demand in Asia is outstripping supply. This means Consol Energy is able to sell coal into these markets at very attractive margins.
In addition, CNX has built a good acreage position in the Marcellus shale. The company owns much of this acreage in fee, so they pay no royalties.
And that’s not all…
CNX’s superb mines in Northern Appalachia are very efficient and would be quite difficult to replicate. This is great for CNX. You see, northern Appalachia coal is close to both domestic and export markets and is of a very high quality.
All of this gives CNX a very competitive advantage over its peers.
Lastly, Consol’s strong cash flows and healthy balance sheet will enable it to fund its natural gas drilling programs moving forward. In fact, most funding will come from internally generated cash.
Bottom line…
CNX looks strong right now, and it seems that option traders believe it will remain strong right through the end of the year.
iShares Silver Trust Options (SLV)
Options in the iShares Silver Trust (SLV) lit up our tracking system Monday afternoon with huge put selling activity.
The beauty of SLV lies in its simplicity. It offers investors the price performance of spot silver by issuing shares backed by physical silver.
This fund represents a direct investment in the underlying commodity and does not invest in equity securities or futures contracts.
You see, governments have historically been lousy stewards of the value of their currencies, and a precious metals position can help hedge a portfolio against such losses.
In addition, investors can also use SLV as a vehicle to speculate on silver prices.
So, SLV rose 2% to $27.78 in early afternoon trading Monday. It peaked around $36 in late February, fell as low as $26 in June, and has been working its way higher since then. The fund has been consolidating above its 50-day moving average in the last two weeks, which could prompt some chart watchers to expect a rally.
In fact, a few option traders are betting on one.
As we moved into afternoon trading yesterday, our radar picked up the sale of three large blocks of SLV put contracts.
The sales centered around the SLV September $27 strike for $0.63, the September $26 strike for $0.31, and the September $25.50 strike for an average price of $0.21. Together, all three strikes traded more than 5,000 contracts.
The strategy behind these trades is fairly simple. These traders are happy to accept income now in return for betting that the recent SLV lows will hold.
So, how is SLV constructed?
Unlike most ETFs, this fund does not track an index.
Instead, the fund holds silver bullion, which it stores at the London branch of JPMorgan Chase. SLV’s price reflects the market price of one ounce of silver, less the accumulated expenses of the fund.
Now there are two major benefits of owning SLV…
First, the fund offers direct exposure to silver prices. In fact, SLV is the next best thing to owning silver coins.
And second, silver prices are not highly correlated with stocks, so the ETF can add diversification to a portfolio.
Bottom line…
SLV is likely to head higher as investors continue to worry about inflation and the potential for a currency collapse. So it’s doubtful we’ll see a reversal in SLV anytime soon.
We’ll see how this trade works out… but I’m jumping in.
Best Buy Options (BBY)
Options on consumer electronics giant Best Buy (BBY) lit up our tracking system Tuesday with a large amount of trading activity.
While the overall market bounced up and down Tuesday, it was pretty much all negative for Best Buy. The stock dropped on less than stellar second quarter earnings.
And now they’re facing other issues as well.
Two big brokers have come out and downgraded this name.
Wedbush downgraded the stock from Neutral to Underperform and lowered their price target to $14.50 a share. The analyst cited Best Buy’s weak guidance and the new CEO’s lack of retail experience. Jefferies also downgraded the shares from Buy to Hold.
As you probably know, Best Buy is the largest consumer electronics retailer in the US.
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 make money by selling warranties and by providing technical support through their iconic “Geek Squad”.
Nevertheless, Best Buy shares took a beating yesterday.
The stock opened down 9.8% and quickly plummeted to a low of $16.25 a share. That’s when option traders came out in force. They placed trades that would suggest this could be the beginning of the end for Best Buy.
What did they do?
They jumped all over BBY put options.
As soon as the earnings news broke yesterday, one trader came in and purchased 5,000 BBY January $10 strike put options. He paid an average price of $0.20 a share for a total cost of $100,000.
Keep in mind, this trade is nothing more than a simple put purchase. In other words, this trader believes Best Buy is going to decline even further in value.
And if he’s right, he stands to make a substantial amount of money.
In fact, buying these options without pairing them with any other options leaves the trader with unlimited profit potential.
Personally, I like this trade. It’s a simple, inexpensive play on BBY’s hefty downside potential.
So, what’s wrong with the company?
On the surface, Best Buy seems like a strong company… but they’re actually facing significant headwinds.
For instance…
Mass merchants, warehouse clubs, and online retailers are all vying for electronics retail market share. The increased competition will likely drive prices lower as well as limit margin expansion opportunities going forward.
In addition, Best Buy is having a difficult time usurping cable providers, iTunes, and Wal-Mart’s proprietary brands for a larger share of the direct-to-consumer media content distribution market.
Essentially, it comes down to this…
Best Buy’s having a tough time competing in the consumer electronics market. The stock has broken down through three key support levels. And option traders believe it’s going even lower.
I think that pretty much says it all.
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!
***Editor’s Note*** Our colleague and friend over at Currency Options Insider released the name of a currency option yesterday that could make your year. One of his recent recommendations went up 146% in a month. Click here to see how this guy is doing so well.
Safe Trading,
Marcus Haber
Category: Unusual Options Trading Activity
