FXI, WM Options – Unusual Trading Activity – February 8, 2013

| February 8, 2013 | 0 Comments

Unusual Trading VolumeThis week we’re taking a look at unusual options trading activity in the iShares China 25 Index Fund (FXI) and Waste Management (WM).

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:

iShares China 25 Index Fund Options (FXI)

An unusual amount of option activity has been detected in FXI this morning. One trader targeted FXI with a large bull call spread. The trade alone accounted for a large part of the option volume on FXI today.

FXI is currently trading for $39.81 per share. The ETF is up 26% from the 52-week low of $31.47 and it’s currently 5% below the 52-week high of $41.97.

The trader bought 15,000 of the January 2014 $42 calls for $2.04 and sold 15,000 of the January 2014 $46 calls for $0.90. Each spread costs the trader $1.14. So they shelled out about $1.7 million to put this trade on.

The bull call spread is a bullish bet on Chinese stocks. The trader will break even if FXI is trading for exactly $43.14 next January. If FXI is below $42, they’ll lose their entire $1.7 million investment. However, if FXI is above $43.14, the trader will make a profit.

The trader reduced the cost of their bullish bet on FXI by selling January 2014 $46 calls. But that also caps the profits when FXI hits $46. In this case, the maximum profit is $2.86 per spread or $4.29 million.

Is this a good trade?

If you believe global economic growth accelerates this year, then China clearly offers a tremendous amount of upside. The last few times economic growth has been on the upswing it has fueled huge rallies in Chinese stocks.

What’s more, Chinese stocks have been on a roll the last few months. And the recent pullback from a new 52-week high looks like a good entry point.

As long as the bullish momentum continues, this trader should be ringing the cash register on a big payday next January.

Waste Management Options (WM)

We’ve seen an unusual amount of option volume in WM over the past few days. Yesterday, option volume was nearly 4.5 times the daily average volume. The vast majority of the volume was bullish call buying activity.

WM is currently trading for $36.21. The shares are up 19% from the 52-week low of $30.41 and are just 5% off the recent 52-week high of $37.98.

Traders bought 14,000 of the March 2013 $37 calls between 30 and 70 cents per contract. The rush of call buying indicates option traders are expecting WM to make a run at the 52-week high before the options expire next month.

What could fuel such a rally?

WM reports quarterly earnings next week. The consensus estimate for them is 60 cents per share. If they can beat expectations, it could easily fuel a surge in the stock price that sends these options soaring in value.

Here’s the thing…

WM doesn’t have a great history of beating earnings estimates. In fact, the last time they outperformed estimates was exactly two years ago in the fourth quarter of 2010.

I think this trade is a sucker’s bet at this point. The options have jumped in value due to the increase in volume. And WM doesn’t have a history of delivering market moving earnings reports. I’d stay away from this one…

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.