NFLX, XOM, GLW Options — Unusual Trading Activity — April 27, 2012
This week we’re going back to take a look at some very unusual options trading activity in Netflix (NFLX), Exxon Mobil (XOM), and Corning (GLW).
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:
Netflix Options (NFLX)
Options in DVD and streaming TV giant Netflix is showing an enormous amount of unusual trading activity this Monday morning.
We’re going to hear earnings from 60% of the companies in the S&P 500 this week. The first mega giant to kick things off today after the close is NFLX.
Netflix should be an interesting read, there are many traders that are not very excited about this name.
The stock is down almost 4% to $103.05, with gigantic options trades being made on the bearish side.
One trade came seconds after this Monday’s bloody market open.
The trade he made was the purchase of put spreads. This bearish strategy is made by buying one put option and then selling another put option at a lower strike.
In this aggressive trade, the trader bought 7,500 contracts of the April (weekly’s) $105 strike put options for an average price of $8.00. At the same time, he sold 7,500 contracts of the April (weekly’s) $85 strike put options for $1.10. A total cost of $5,175,000. That’s a monster position!
This option trader must have a strong conviction that Netflix is going to move substantially lower.
If he’s correct, his profits will be larger. Remember, when buying a put spread, the maximum profit is the difference between the strike prices minus the amount paid for the spread.
In this case, he paid $6.90 a piece. In other words, his maximum profit comes if NFLX trades below $85 a share by the end of the week. And with a $15 difference between strike prices, his profit will max out at a hefty $6,075,000 ($8.10 per share).
This is a smart option trader. He’s limiting his overall exposure to 6% of the stock price.
In addition, according to our tracking system, this trade carries an even 50% probability this trader will earn money.
As a professional option trader, I wouldn’t hesitate at all to make this same trade.
It seems clear that this huge trade on the NFLX comes on the heels of some disturbing news on how Netflix is going to gain revenue share moving forward.
As I’m sure you know, Netflix operates a fast-growing DVD rental and video streaming service. It’s available in the United States, Canada, and in other international countries.
They deliver digital content to PCs, Internet-connected TVs, and consumer electronic devices. Some include the Xbox 360, Playstation, and Wii.
Here’s the problem…
The premium cable channel Starz that owns streaming rights to Disney and Sony movies announced in early September that it doesn’t plan to renew its deal with Netflix.
And with its content being removed from customer queues, the inexpensive price tag to use NFLX is poised higher.
Netflix also relies on unlimited bandwidth usage for its offerings. Subscribers generate as much as 20% of all streaming internet traffic.
However, there have been many rumors that broadband providers could be moving to a pay-for-use model. This will also greatly increase the cost for Netflix subscribers.
So, this earnings report is going to come down to its guidance and how these points are going to affect NFLX moving into the future.
If they’re concerned, so should you. We’ll wait and see.
Exxon Mobil Options (XOM)
Options in Exxon Mobil lit up our tracking system this Wednesday morning with a large amount of unusual trading activity.
Well, the largest market cap company in the world (Apple) came out with earnings Tuesday and the second largest is now on deck.
Mega oil company Exxon reported earnings Thursday morning.
So, how did option traders position for this highly anticipated event?
With the broad market substantially higher on the heels of Apple’s blowout earnings, XOM is trading up at $86.90 a share. And option traders are expecting more good news tomorrow.
Right out of the gate, one option trader came and purchased the XOM April (weekly) $87.50 strike call options.
In a single print, he purchased 5,000 contracts at an average price of $0.40. A total cost of $200,000. And now he’s got unlimited upside potential above $88.10!
Remember, buying call options is a strategy used when you think a stock is going to move higher.
This was a well-planned strategic and inexpensive play on this company.
So, what’s behind our option traders thinking?
As you know, Exxon Mobil engages in the exploration and production of crude oil and natural gas. They also transport and sell crude oil, natural gas, and petroleum products.
As of December 31, 2011, Exxon Mobil operates 37,692 operated wells. They have operations in the United States, Canada/South America, Europe, Africa, Asia, and Australia/Oceania.
But, I think the outright call buying is because of a few other factors…
There are other oil and gas companies that don’t have the resources or expertise to effectively explore and produce oil and gas in their countries. They’ll need to partner with private firms, and Exxon is the most attractive option.
Also, with high-performing operations and global integration, Exxon is one of the best positioned to weather a drop in commodity prices.
In fact, that’s exactly what’s been happening lately.
And this diversity of operations, as well as its vast geographic footprint, offer protection against regional economic weakness.
So, XOM would definitely be a company I’d purchase.
Corning Options (GLW)
Options in glass maker Corning lit up our screen again yesterday with a large amount of unusual trading activity.
The famous TV screen manufacturer released earnings Wednesday which were in-line with analysts’ expectations. And with the broad market substantially higher yesterday, GLW followed suit climbing from $13.40 to $14.20 a share this morning.
So, what are option traders doing?
Now, here’s an interesting thing. It’s a bit unusual for us to see such enormous option activity after a release.
After Corning’s earnings, a gigantic option trade came in on the call side. Probably one of the largest single trades ever for this company.
This option trader executed an order to purchase 85,000 contracts of the GLW January $17.50 strike call options for an average price of $0.40 a share.
Remember, buying call options is a strategy used when you think a stock is going to move higher.
That’s quite a trade!
So, what’s on this option trader’s mind?
Back to that in just a moment…
If you don’t already know, Corning is the leading designer and manufacturer of glass displays. Corning’s glass display business accounts for almost 40% of its total revenue.
However, they also produce ceramic substrates found in liquid crystal displays, fiber-optic cables, automobiles, and laboratory products.
But, the company’s outlook is really moving the stock…
Moving forward, Corning’s ability to create thinner and larger glass panels will support demand for larger TVs and computer monitors.
Also, its market for high-end phones and tablet computers is growing rapidly, driving higher demand for Corning’s sophisticated glass products.
In fact, its diversity in this high tech era is what has option traders so excited.
Now, back to our monster trade.
This is an interesting one, there could only be two possibilities.
The first, a straight out call option speculation trade. The cost, $3,400,000 with unlimited upside potential.
The second possibility is more reasonable. It’s a big institutional stock replacement trade.
Given the length of time and inexpensive price, it seems like a big institution came in selling their stock position and replacing it with options.
This will allow profits to keep coming in as long as GLW continues to rise in value. It’ll also limit the traders risk to $0.40 a share over the next nine months.
What a clever idea! And that’s probably why this trade continues.
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
