INTC, FFIV, MSFT Options – Unusual Trading Activity – April 20, 2012

| April 20, 2012 | 0 Comments

Unusual Trading VolumeThis week we’re going back to take a look at some very unusual options trading activity in Intel (INTC), F5 Networks (FFIV), and Microsoft (MSFT).

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:

Intel Options (INTC)

Options in mega chipmaker Intel showed massive activity Tuesday morning.

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

And with INTC reporting earnings after the close, option traders positioned for a rise in the stock price.

Even though the Nasdaq closed down 23 points or 0.75% Monday, Intel saw no such weakness.  As a matter of fact, Intel finished up $0.32 at $28.40 a share.

During Monday’s trading session, option traders came out in force buying over 2,000 May $28 – $29 call spreads.

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 cap their risk.

What was interesting Tuesday morning was that option traders ratcheted it up a notch…  coming out and buying May $29 – $30 call spreads.

They aren’t looking for a grand slam, but rather a few base hits.  These call spreads were purchased for a cost of $0.25 a share.

And with INTC trading higher at $28.55, these traders are looking to triple their money by May expiration.  That’s because the maximum profit on a call spread is the difference in the strikes minus the price paid ($1.00-$0.25).

So, what’s behind this bullish call spread?

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 call activity was due to analysts’ expectations for upcoming earnings and its recent outperformance in the technology sector.

For one, when we look back at past earnings, INTC has consistently beaten expectations three out of the last four quarters.

And they’re also one of the best cross-marketing companies in the business.  Intel has prominent brand recognition because most PC manufactures show Intel’s logo on all of their products.  In other words, unless you have a MAC, you can’t really look at a computer without seeing the word Intel somewhere on it.

F5 Networks Options (FFIV)

Options in network traffic company F5 Networks experienced large activity Wednesday morning.

So we looked to see how option traders were positioning for FFIV earnings after the close.

It looked like they were neutral to bullish on this name.  In other words, traders were looking for either no movement or a slight movement to the upside.

Although the Dow Jones and S&P 500 came off a stellar day Tuesday, FFIV was just trading down fractionally at $123.45.

One option trader came and sold over 2,000 put spreads.

This is a strategy where one put option is sold and another put option is bought at a lower strike.  Since this strategy involves selling a higher priced put, this position is done for a credit.

Now, purchasing the lower strike put reduces a trader’s margin requirement as well as limits his risk to the difference between the strikes minus the credit received.

Remember, a short put spread is an option strategy where a trader wants the stock price to remain stagnant or move higher.

So, the trade was the sale of 2,000 FFIV April $120 strike puts for $4.40 a share and the purchase of the FFIV April $110 strike puts for $1.30… for a total credit of $620,000.

With only two days left until April expiration and earnings in the afternoon, this option trader was thinking F5 Networks would remain above $120 a share.  And he’d finish the week profiting the entire $620,000.

Not bad for a week’s work!

But why a play on F5 Networks?

For those of you who don’t know, F5 Networks provides products that help manage network traffic, application complexity, and network security.

F5’s customer base has evolved from an initial focus on Internet service providers and e-commerce sites to the corporate IT market.

Customers include Deutsche Telekom, Citigroup, eBay, General Electric, and General Motors.

I think this large put activity was due to analysts’ expectations for its upcoming earnings and its niche market in the technology sector.

During the past year, FFIV has cultivated a nice marketing relationship with Oracle (ORCL).  And by allowing outside vendors like ORCL to get involved in specific tasks for its products, they are cultivating an even more powerful sales channel.

Also, FFIV has been able to create proprietary systems for its network.  This makes it very difficult for other firms to use anything but F5 products.

Microsoft Options (MSFT)

Options in mega software company Microsoft lit up the options radar in a big way Thursday morning.

You didn’t think we’d go through earnings season without mentioning “Mr. Softy,” did you?

As one of the largest components of the Dow Jones and the Nasdaq, the way Microsoft responds to earnings will have a big effect on these two major indices.

Options activity in MSFT over the last week has been 10 times above average.

Certainly option traders know this and seemed to be a little concerned.

You see, trading has been very sporadic following technology stock earnings reports.  Many companies have traded down despite better than expected numbers.

I think one trader expected the same to happen with MSFT.

Ten seconds after the opening bell Thursday, our tracking system picked up a block of 14,000 contracts of the MSFT April $30 puts.  They traded at an average price of $0.06 a piece.

This was certainly a speculative bet.  Meaning, with only one day left before April expiration, this was a hit or miss options play.

However, if the reaction to Microsoft’s earnings is similar to what we’ve seen from Google (GOOG), Intel (INTC) or Qualcomm (QCOM), this option trader could soon be cashing a big check.

But why so much activity today?

As I’m sure you know, Microsoft develops the Windows PC operating system, the Office suite of productivity software, and enterprise server products.

The Windows PC and Office franchises collectively account for nearly 60% of the firm’s revenue, and the server and tools business contributes 24%.

The firm’s other businesses include the Xbox 360 video game console, Bing Internet search, business software, and software for mobile devices.

This large put activity was in reaction to nothing more than a technical pullback after earnings. 

I think MSFT for the long term is still a good investment.

During this past year, Microsoft’s development of the Azure platform is poised to develop into a larger business than the company’s historical cash cows such as Vista.

Also, Microsoft’s partnership with Nokia (NOK) will drive large market share gains for the Windows Phone platform and create the next $1 billion-plus annual revenue stream for the company.

Bottom line… MSFT has a lot going for it.  And I believe this large put position was simply the result of other tech giants trading lower right after their earnings announcements.

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.