HLF, INTC, T Options — Unusual Trading Activity — May 4, 2012
This week we’re going back to take a look at some very unusual options trading activity in Herbalife (HLF), Intel (INTC), and AT&T (T).
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:
Herbalife Options (HLF)
Options in fitness and health products company Herbalife (HLF) are starting to show some unusual option trading activity.
All of the three major indices traded higher Monday. However, shares in HLF are getting taking out back and beaten down.
And when I say beaten down, I’m talking about a minus 19%! Over a short period, the stock has moved from $59.00 all the way down to $56.50.
Option traders dream for moves like this because it gives them plenty of opportunity to execute trades no matter what direction they think the stock will move.
So, just exactly what are option traders doing?
Back to that in a minute… First, let’s quickly dig a little deeper into this name.
If you don’t know, Herbalife sells weight-management, nutrition, energy and fitness products. It operates 1.9 million distributorships in more than 70 countries across the globe, with its direct sales channel accounting for more than two billion dollars in revenue a year.
So, what’s going on?
Monday after the open, Greenlight Capital’s CEO David Einhorn came out with some controversial questions about some of their accounting disclosures.
The only thing is… we don’t know whether he has a legitimate point about the disclosures.
However, traders are assuming that he may short the stock and is asking these questions knowing the stock could decline. And this will give him a reason to take on a larger short position.
Whatever it is, it’s working.
Option traders are going crazy. They think this move on one investor comment is overdone.
So they’re positioning for a quick bounce back.
Our tracking system continues to light up, with option traders buying straight out call options.
The buying seems relatively even across the HLF May $57.50 call strike all the way up to the HLF May $70 call strikes.
Don’t forget, buying calls with no other positions is a speculative play that Herbalife will not stay down 19% for the long term.
To sum it up, I don’t think these option traders are looking for anything except a short bounce on HLF which has been initiated so far today.
Intel Options (INTC)
Options in chipmaker Intel (INTC) are showing enormous options activity today.
Since Intel’s disappointing earnings a few weeks ago, it’s been on a rollercoaster ride.
In fact, after its earnings, the stock plummeted to a low of $27.24 before rebounding. And today it’s trading back above its pre-announcement level at $29.22.
Here’s the thing today… option traders think something is wrong with this sudden run up.
More specifically, one option trader came in right at the open and purchased 20,000 contracts of the INTC June $29 strike puts at an average price of $1.00 a piece.
He actually spent $2,000,000 betting this stock is going to stop moving higher and again begin to fall in price.
Remember, buying put options outright is a strategy used when a trader feels a stock is going to decline in value.
So, what’s behind this huge purchase of put options?
As most of you know, Intel is the world’s largest chipmaker based on revenue and unit shipments.
The company is also known for its dominant market share in microprocessors for personal computers (PCs).
I think this large put activity is due to nothing more than a large institution or hedge fund thinking INTC is technically at the top of its trading range.
However, let’s not forget one of the keys I’ve noticed in my many years of trading and watching large option traders and what their trading.
These traders are usually right more often than they’re wrong!
AT&T Options (T)
Options in telecommunications company AT&T (T) showed large options activity Thursday.
Since AT&T reported earnings back on April 24th, the stock has been moving up in a straight line.
In fact, after its earnings, the stock soared to a new high of $33.30 before leveling. And now it’s holding steady around $33.00 a share.
What’s interesting is that option traders seem to be thinking T is bound for another breakout to the upside.
What makes me think this?
Simple… one very large option trade.
Even though the stock is down, option activity is up.
Our tracking system picked up a large short call spread (bear call spread) Wednesday, and traders are continuing to add to their positions.
A trader sold 15,400 T July $32 strike call options for an average price of $1.44 a piece. Immediately following, the trader bought 15,400 T July $34 strike calls for a price of $0.37 a piece.
What we’re looking at here is an option trader that brought in a credit of $1,647,800.
But here’s the kicker… he needs AT&T’s stock to move lower and trade below $32.00 a share by July expiration. If successful, he’ll keep this enormous amount of money as pure profit.
So, what’s going on here?
As most of you know, AT&T is the second-largest US wireless carrier. It serves over 89 million customers and 12 million “connected devices” such as e-readers.
AT&T is also the dominant local phone company in 22 states, serving about 40 million phone lines, 16 million Internet users, and 4 million television customers.
In addition, it provides phone and data services, such as Web hosting and data transport, to large businesses nationwide.
I think this large call activity is just another large institution or hedge fund thinking T, along with the broad market, is getting a little toppy.
No matter what the earnings report said, AT&T’s heavy reliance on the iPhone is still an issue.
About 30% of its retail customers use this device, and the company’s reputation has taken a hit as data-hungry users have clogged networks in some areas. These customers could be ripe for defection of the AT&T network.
Also, a large portion of its revenue and cash flow still comes from fixed-line local and long-distance phone services. However, these businesses are under increasing attack from competitors such as Sprint (S) and Verizon (VZ).
Bottom line… T looks strong now, but what the future holds is anyone’s guess.
More Options Ideas…
That wraps up this week’s unusual options trading activity…
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
Category: Unusual Options Trading Activity
