FRO, X Options — Unusual Trading Activity — March 23, 2012
This week we’re going to take a look at some very unusual options trading activity in Frontline (FRO) and United States Steel (X).
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:
Frontline Options (FRO)
Options in beleaguered oil shipper Frontline experienced quite a bit of unusual volume during last Friday’s afternoon trading session.
With Frontline trading mid-day around $7.49 a share, option volume unexpectedly exploded. Overall option volume showed 23,000 contracts traded hands. That was nearly 12 1/2 times the normal daily option volume, with most of the volume on the call side.
Someone obviously thinks Frontline shares are headed much higher!
The most interesting trade was a sale of the May 7 strike puts and seconds later the purchase of the May 8 strike calls. This was done over 3,000 times.
By selling these puts, the trader collected $.80 in cash premium. The trader then took this money and used it to purchase the May 8 strike calls for $.95. So, he was able to initiate his position for only $.15 per share.
So, as long as Frontline is above $8.15 at or before May expiration, the trader has unlimited upside potential.
And I believe this trader is definitely on to something…
You see, Frontline is one of the world’s largest shipping companies that transports crude oil, coal, and iron ore worldwide.
However, shares of Frontline have been taken out to the woodshed over the last year as shares fell from $25 all the way down to a low of $2.69.
This was due to an increase in oil supply and a decrease in oil prices. The result, FRO saw its day rates decline on their giant tankers.
However, things appear to be turning around.
After reaching a bottom in November, Frontline has rallied 178% to over $7.00 a share.
The resurgence is due to recent notes by their CEO John Fredriksen and investment bank Dahlman Rose concerning a surprising increase in recent shipping rates for oil tankers.
Additionally, Mr. Fredriksen said, “with oil prices staying firmly above $100 a barrel and a strengthening global economy, our business is poised higher even during the summer months.”
So, could this signal a continued rise in share price?
It’s too early to tell right now, but it looks like option traders are beginning to think so!
And don’t forget, Frontline is scheduled to release their next earnings report right around this time. In other words, we could be in for a lot of volatility as we get closer to this expiration… so stay tuned.
United States Steel Options (X)
Options in steel giant United States Steel (X) experienced quite a large amount of unusual trading activity on Tuesday.
As X closed the day at $31.37, the overall options activity showed a staggering 46,000 contracts change hands. That’s nearly 5 times the normal activity for US Steel.
And just about 35,000 of these options indicated bullish activity.
Option traders came in buying mainly the 31, 32, and 33 strike calls for March and April’s expiration. The prices ranged from $0.16 for March calls to $.83 for April Calls. When we see option buying under $1.00, it almost always reflects speculative buying.
However, that’s not all. Another large trade in X was also spotted on our tracking system.
This was the sale of over 7,000 contracts of the April 31 strike put options for $1.30.
These option sellers obviously believe that US Steel stock will remain above $31 by April’s expiration. If so, they’ll get to keep the whopping $910,000 in premiums they collected.
This unusual activity came on the heels of news that steel demand in China is slowing considerably.
However, I believe this news was overblown.
In fact, an analyst from Morgan Stanley came out yesterday and said, “The sentiment in the Chinese steel markets is improving and mills are gradually raising prices as inventories decline.” This is certainly positive news for steel makers.
The upshot of all of this is option traders believe there’s a unique opportunity to take advantage of some overblown news. We’ll see how it all plays out!
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!
Category: Unusual Options Trading Activity
