DIS, ARO, GLD Options — Unusual Trading Activity — August 3, 2012

| August 3, 2012 | 0 Comments

Unusual Trading VolumeThis week we’re going back to take a look at some very unusual options trading activity in Disney (DIS), Aeropostale (ARO), and SPDR Gold Shares (GLD).

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:

Disney Options (DIS)

Options in the company for “all ages,” Disney (DIS), experienced a large amount of trading activity late last Friday afternoon.

Disney is an interesting company right now. 

You see, two important events are exerting a big impact on this popular name.

First, DIS just set a new 52-week high on Friday of $50.54 a share.  And second, the company is scheduled to report second quarter earnings on August 7, 2012 after the bell.

So, given these two big data points… what are option traders doing?

One large trader apparently thinks DIS may have put in a short term top at this $50 level.  But it looks like he’s still bullish on the long-term outlook for the shares.

I’ll explain why I think so in just a moment… 

First, it’s important to note something important about the stock’s recent trading history.   While Disney stock has moved about 3.5% up or down on earnings historically, it has moved higher after the last few quarterly earnings reports.

So, with Disney at a key juncture, option traders are looking at higher than normal volatility and selling Disney calls.  Remember, high volatility drives up option prices and makes selling options more attractive.

Getting back to the trade…

On Friday afternoon, most of the option activity was centered around the DIS September $48 strike calls for a price of $2.90 a piece.  These options were traded 16,000 times.

To figure out what was going on, I had to look a little deeper into this trade. 

You see, option traders don’t usually speculate with such high priced options.  And there was no offsetting option position to indicate an attempt to lower the $2.90 premium.

However, after doing a little research, I realized what this trader had done.  At the same time he sold the Disney calls, he simultaneously purchased 16,000 shares of Disney stock at $49.75.

Simply put… he sold covered calls against a new long stock position in DIS.

And with short term support at $48 a share, I think selling this strike is a great idea.

Now, what else is driving this trade?

Clearly, the trader also has a bullish long-term view on Disney.

And for good reason…

As you know, Disney owns the rights to some of the most famous characters ever created, including Mickey Mouse and Winnie the Pooh.  These characters and many others are featured in several Disney theme parks around the world.  

In addition, the company has extensive media holdings, including ABC, The Disney Channel, ESPN, and a 42% stake in A&E.

And, while making movies is a hit-or-miss business, Disney’s large library of animated content with popular brands and characters greatly reduces the stock’s volatility.

Bottom line…

Disney is a well diversified, low-risk stock that I wouldn’t mind owning with a small amount of protective calls against it. 

And you shouldn’t either.

Aeropostale Options (ARO)

Options in big retailer Aeropostale (ARO) traded some large volume Tuesday afternoon.

Even though retail earnings have been less than stellar, ARO bulls don’t seem to be done shopping just yet.

According to our tracking system, Aeropostale has been ripping higher lately, and the bulls are looking for even more gains over the next few months.

Yesterday before the close, we detected the purchase of 9,500 ARO September $21 strike call options.

With ARO up fractionally today at $20.17, the calls went off at $1.05 a piece.

This gives traders six weeks to see unlimited upside profit above $22.05.  And remember, ARO peaked at $23 a share earlier this year, which is making option traders think on any rally it could hit that number in a hurry.

In addition, option volume was 11 times greater than average in yesterday’s session, with calls outnumbering puts by more than 160 to 1.

So, the question is, why so many call options on this mediocre retailer?

As most of you know, Aeropostale is a mall-based retailer of apparel and accessories.

They target 14- to 17-year-old kids through their Aeropostale stores and 7- to 12 year-olds through kids stores.

The company provides a selection of fashion basics at compelling values.

Here’s the thing…

After getting beaten down heavily during the last month or so, ARO is now surging higher on its recent earnings announcement.  

What’s more, continued high unemployment rates among teens could bode well for this low-priced retailer.  It’s a no-brainer that many of these out-of-work teens will continue to look for lower price point alternatives in order to stretch their budgets.

The value proposition that Aéropostale has historically offered versus its competitors should resonate across all demographic bases, including parents that purchase for their children.

In addition, ARO will benefit from shorter lead times and improved sell-through as their supply chain efficiencies and product allocation systems operate appropriately faster.

I think this is exactly what options traders are betting on here.

Let’s wait a few days and see how this plays out!

SPDR Gold Shares Options (GLD)

Options in the SPDR Gold Shares (GLD) lit up our tracking system this morning with huge call buying activity. 

The heavy activity is probably due to perceived volatility in the metal with all of the economic announcements due out over the next few days.

Whether stimulus occurs or not, there is an argument that gold could be poised to move higher.  And it seems option traders are ready to take advantage of whatever comes out of the FOMC meeting and the ECB meetings this week.

Even though gold prices are lower this morning with GLD trading down fractionally at $155.13, option volume is about 50% above normal.  

So, the question… is GLD now in an uptrend? 

It seems there are option traders who feel it is.  And this is certainly made readily apparent by enormous trading coming through this morning.

Option traders came in minutes after the open this morning and scooped up November calls in GLD.

More specifically, they purchased 25,000 contracts of the GLD November $180 strike calls for an average price of $1.15.

Just to put that into perspective, the position represents the equivalent of 250,000 shares of GLD at a cost of $287,000. 

Now, if GLD rises above $181.15 by November expiration, it’s off to the races for these traders who have unlimited upside profit potential.

That’s a long way to the upside in a few short months.

Historically, as the market moves lower, gold prices usually move higher.  However, this has not been the case over the past few weeks.

Gold has broken out of a range and continues to move higher whether the market is moving up or down.  And as the broad commodity market continues its volatility, gold prices could continue to rise.

And I’m in total agreement with this trade. 

GLD’s continued surge is a tug of war between fear of inflation and fear of a currency collapse.  So it’s very likely we will not see a reversal anytime soon.

We’ll see how this trade works out, but I’m jumping in.

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.