LMT, XHB Options – Unusual Trading Activity – March 22, 2013
This week we’re taking a look at unusual options trading activity in two retailers – Lockheed Martin (LMT) and SPDR Homebuilders ETF (XHB).
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:
Lockheed Martin Options (LMT)
An unusual amount of option activity has been detected in LMT. Daily average volume in LMT has averaged around 3,300 contracts over the last month. But traders sent option volume in LMT to nearly 23,000 contracts yesterday and there were nearly 5 times as many calls as puts. The large amount of calls indicates traders are bullish on the stock.
LMT is currently trading for $92.70 per share. The stock is up 20% from the 52-week low of $77.26 and it just shy of the 52-week high of $96.52.
The majority of the volume came from one trader rolling their call options out and up to a higher strike. 8,000 LMT April 2013 $92.50 calls were sold for $1.35 and at the same time 8,000 LMT June 2013 $97.50 calls were bought for 90 cents.
The trader was likely locking in a profit on the April calls and using a portion of the proceeds to buy the June calls. The new position will turn a profit at expiration if LMT rises above $98.60. But the trader stands to lose all of their investment if LMT is below the $97.50 strike price when the options expire.
This is a smart move by the trader. They locked in profits on their April call option trade. And the June calls give them even more upside if LMT continues to move higher over the next few months.
What’s more, I like the bullish call on LMT. It’s no secret the airline industry is going through a period of change. Global air traffic is growing at a strong pace but the commercial airline industry is consolidating into the hands of a few major players.
In short, this should lead to greater profitability amongst the airlines. And in turn, it should help fuel demand for LMT’s commercial aircraft.
What’s more, if LMT breaks out above the previous high, we could see the stock gain momentum quickly. This looks like a solid trade to me.
SPDR Homebuilders ETF Options (XHB)
Our tracking system has detected bearish options activity in the homebuilders ETF.
XHB is currently trading for $29.99. The shares are up 60% from the 52-week low of $18.73 and are currently just below the 52-week high of $30.66.
Yesterday, option volume surged to four and half times the daily average – 52,000 puts and 13,000 calls. The two most active strikes were the September $24 and $29 puts.
The traders appear to be buying a bear put spread (buying the 29s and selling the 24s) to profit from a pullback in the fund over the next six months.
Will XHB fall?
There’s no doubt homebuilder stocks have had a great run. And a correction after the huge run isn’t out of the question. But I don’t like this trade…
I’m fond of saying “the trend is your friend” and the XHB’s trend is higher. In fact, XHB just put in a new 52-week high a few days ago.
At this point, the fundamentals for the homebuilder industry are bullish. And the charts show a strong uptrend. Trying to call a top in a stock or ETF, no matter how overvalued it is, is a recipe for disaster.
Until something changes with the fundamentals of the housing market or the chart shows a reversal… I’d stay away from betting against this red hot sector.
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
Category: Unusual Options Trading Activity
