DIS, CSCO, CRM Options — Unusual Trading Activity — May 11, 2012

| May 11, 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), Cisco (CSCO), and Salesforce.com (CRM).

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 mouse house” Disney (DIS) experienced a large amount of trading activity Monday.

Disney is an interesting company right now. 

Not only are Disney’s earnings scheduled to be announced Tuesday after the close, but also its long anticipated movie, “The Avengers” came out last weekend.

“The Avengers” brought in $200 million at the box office over the weekend, well above expectations.

So, between these two big data points, what are option traders doing today?

Simple… most traders are selling covered calls against their stock positions.

It’s important to note that historically Disney’s stock moves about 3.5% either way on earnings.

With the market at a key juncture, option traders were looking at higher than normal volatility and selling Disney calls.

Remember, selling calls against a stock is a covered call strategy.

On Monday morning, most of the option activity was centered around the DIS October $46 strike calls and the DIS January $46 strike calls.

The October $46 call options sold for a price of $1.57 a share.  This was a 3.5% premium on the current stock price.

The January $46 call options sold for a price of $2.25 per share.  That represented a 4.8% premium of Disney’s stock price.

And with long term support at $42 a share, selling either one of these strikes was a great trade.

Now, what else drove this option action?

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 others are featured in several theme parks Disney owns or licenses around the world. The company owns ABC, The Disney Channel, ESPN, and a 42% stake in the A&E channel.

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

Bottom line… Disney is a well diversified, low risk stock that I wouldn’t mind owning.

And you shouldn’t either.

Cisco Options (CSCO)

Options in data networking giant Cisco (CSCO) showed enormous activity Tuesday.

Why?  You guessed it… Cisco is scheduled to report its Q2 earnings Wednesday after the close.

What’s more, Cisco’s CEO John Chambers usually makes important comments after its earnings.  And he’s one of the most highly respected and listened to CEOs in the technology community.

So, between CSCO earnings and Chambers’ comments, the broad market could easily be moved in either direction.

Because of this unique pair of events, option traders were scurrying to put on huge positions before Wednesday afternoon.

Our tracking screens lit up more than ever with hundreds of thousands of CSCO option contracts changing hands.

Most contracts showed up on the call side, indicating a bullish outlook.

A majority of the action was concentrated at the CSCO May and June $19 and $20 strike calls.

Prices in May range from $0.40 a share for the $19 strike calls to $0.13 for the $20 strike call options.

June expirations showed a similar setup.  The CSCO June $19 strike calls were being purchased for around $0.65 and the June $20 strike call options for an average price of $0.30.

These four strikes represented the bulk of all option activity for Cisco Tuesday.

And why these strikes?  Because the chart was showing very strong support levels between them.

Now, what else is driving this huge call activity?

As most of you know, Cisco Systems is the world’s leading supplier of data networking equipment and software.

Its products include routers, switches, access equipment, and network-management software that allow data communication among computer networks.

In addition, Cisco has recently entered newer markets, such as video conferencing, web-based collaboration, and data center servers.

I think this large call activity was due to upbeat company news as well as highly anticipated news that was going to come from Chambers.

Investors will listen very intently to his outlook and guidance on the company and the economy.

And, it’s obvious that option traders were expecting some good news to come from him this quarter.

Salesforce.com Options (CRM)

Options in software services company Salesforce.com (CRM) showed larger than normal activity this week.

Don’t forget, we’re still focusing on heavy activity along with upcoming earnings.

And with CRM reporting earnings next Thursday after the close, option traders are positioning for a rise in the stock price.

Let’s remember, traders must be aware that next Friday is May expiration.  So, however traders position for this company, their options expire the very next day.

In other words, there’s no room for error!

Even though the Nasdaq closed down for the past six days, option traders don’t seem to be concerned when it comes to Salesforce.com.

So, with CRM trading at $137.09, how are traders positioning for next week?

Simple… they’re buying call spreads.  Specifically the CRM May $145 – May $150 call spread.

Right out of the gate yesterday one option trader bought 2,000 contracts of this spread.  He paid an average price of $1.85 a share or a total cost of $370,000 for the position.

Remember, a call spread is an option strategy where one call option is purchased and another is sold at a higher strike price.  This is done to reduce the upfront premium, as well as to limit risk.

What’s interesting here is that this is a very disciplined trader.  He’s not looking for a home run.

We know this by examining the details of the trade.  It’s at-the-money and it’s only a five point spread.

This limits his risk to $1.85 a share.  He only needs CRM to rise 7% on earnings and he’ll collect $3.15 a share.  A profit of $630,000.

Not bad for a one week holding period!

So, what’s behind this bullish call spread?

As most of you know,Salesforce.com provides cloud computing and social enterprise solutions to various businesses and industries worldwide.

The company delivers customer relationship management applications through the Internet or the cloud.  And its cloud computing services enable customers to connect, engage, sell, service, and collaborate with their customers.

In addition, Salesforce.com has spent years perfecting its hosted software model.  It has a significant lead on potential software rivals such as Oracle (ORCL) and SAP.

It all comes down to this…

I think this large call activity is due to analysts expectations for upcoming earnings and recent strength in the technology sector.

So, as we anxiously await earnings next week, let’s hope options traders are correct and CRM moves higher.

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.