MET, SLV, HLF Options — Unusual Trading Activity — September 28, 2012
This week we’re going back to take a look at some very unusual options trading activity in MetLife (MET), iShares Silver Trust (SLV), and Herbalife (HLF).
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:
MetLife Options (MET)
Options in mega insurer MetLife (MET) are experiencing a large amount of trading activity today.
MetLife is an interesting company right now…
Life insurance companies realize they must match the cheapest and best products currently on the market in order to generate sales. This leads to a cycle that pushes down industry returns.
Against this backdrop, it is extremely difficult for MetLife, or any life insurer, to generate sustainable excess returns.
So what makes MET so special?
MetLife tries to set itself apart by pursuing corporate customers in the mature US market. In fact, they provide insurance for 90% of the companies in the Fortune 100. This not only sets them apart, but allows the company to generate more revenue than their competitors.
At least, I believe this is what options traders are thinking.
How do I know this?
Simple… Just this morning a single trader came in and purchased 50,000 MET December $40 strike call options for an average price of $0.31 each.
This was obviously no small trade at $1.5 million.
And as a straight call option play, this option trader will see unlimited profits if MET continues its expansion into the corporate world.
However, that’s a pretty large guess, so what’s behind his thinking?
MetLife was formed into a public company in 2000. Today, MetLife is the largest life insurer in the US by total assets.
The US insurer provides a variety of insurance and financial services products through both captive and independent retail distribution channels.
Outside the US, MetLife operates in Japan and over 50 countries within Latin America, Asia-Pacific, Europe, and the Middle East.
But wait, there’s more…
In 2010, MetLife acquired ALICO. And this has strengthened the company’s Asia franchise while providing substantial growth opportunities in key emerging markets.
In addition, MetLife is the market leader in the group life insurance business. The company benefits from the sticky nature of corporate customers who don’t shop exclusively on price, but on customer service and value… this being one of MET’s strong suits.
Now, most importantly, MetLife will likely resume share buybacks or raise dividends as soon as the company is approved to de-register itself as a bank holding company. This action should happen by the end of 2012.
No question about it, MetLife offers customers a portfolio of solutions that can address the entire insurance stream for a long time into the future.
Call me crazy, but I think this option trader is onto something. Do you?
iShares Silver Trust Options (SLV)
Options in the iShares Silver Trust (SLV) are lighting up our tracking system this morning with huge put spread activity.
The beauty of SLV lies in its simplicity. It offers investors the price performance of spot silver by issuing shares backed by physical silver.
This fund represents a direct investment in the underlying commodity and does not invest in equity securities or futures contracts.
In addition, investors can also use SLV as a vehicle to speculate on silver prices.
So, what’s the trade? Read carefully because it’s a little more complex than usual.
The iShares Silver Fund is just off its six-month high reached last week, but a long-term option trader is anticipating a decline.
So far this morning, SLV is up 0.73% to $33.17 a share. The exchange-traded fund touched $34.05 on Friday, its highest price since its 52-week peak from February.
Today’s option activity is all the way out to January 2015. This expiration is available only in a few underlying assets.
The trader bought 13,000 of the SLV $26 strike put options for $3.80 and sold 13,000 of the SLV $38 strike call options for $5.10.
The open interest in each strike was fewer than 1,000 at the beginning of the day, indicating that this is a new position.
From the way this trade looks, it appears to be a bearish one.
As a result, come two years from now, the trader would keep the $1.20 credit if SLV is between $26 and $38 at that long-term expiration. Still not a bad return for a 12 point gap in the stock price.
So, how is SLV constructed?
Unlike most ETFs, this fund does not track an index.
Instead, the fund holds silver bullion, which it stores at the London branch of JPMorgan Chase. SLV’s price reflects the market price of one ounce of silver, less the accumulated expenses of the fund.
Now there are two major benefits of owning SLV…
First, the fund offers direct exposure to silver prices. In fact, SLV is the next best thing to owning silver coins.
And second, silver prices are not highly correlated with stocks, so the ETF can add diversification to a portfolio.
Bottom line…
SLV is likely to stay in this fairly tight trading range as investors continue to take risk and then take risk off. So it’s doubtful we’ll see a reversal in SLV anytime soon.
We’ll come back in a while and see how this trade is working out.
Herbalife Options (HLF)
Options in fitness and health products company Herbalife (HLF) are showing tremendous trading activity this morning.
All three major indices started with fractional moves higher to start the day. And then… bam! They took off like a rocket.
But what’s interesting is that shares in HLF are outpacing even the large market move.
HLF is up over 5% so far today at $47.52.
And option traders believe it’s going even higher.
But before we take a look at the options activity, let’s first 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 $2 billion in revenue a year.
So, what’s going on today?
Back in May, Greenlight Capital’s CEO David Einhorn came out with some controversial questions about Herbalife’s accounting disclosures. The only thing is… it wasn’t clear at the time if his concerns were legitimate.
However, traders didn’t want to chance it, so they sold the stock off over 8% in a matter of hours.
But now, a few traders are thinking the opposite.
With Einhorn getting ready to speak at another conference very soon, some traders are speculating he will flag HLF again, but this time on the positive side. And at least one option trader is going crazy buying call options, positioning for a longer term bounce.
As a result, our tracking system continues to light up with straight-out call option buying.
During the mid-morning session today, one trader came in and bought 11,000 of the HLF October $52.50 strike call options at an average price $1.15.
Don’t forget, buying calls with no other positions is a speculative play that Herbalife will not stay down in the weeks ahead. And the trader’s profit potential for this trade is unlimited as there’s no limit to how high HLF can go.
To sum it up, I think this option trader is looking for a bounce on HLF with David Einhorn as the catalyst.
Let’s watch to see if he’s right!
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
