RIMM, CRM, TEX Options — Unusual Trading Activity — July 6, 2012

| July 6, 2012 | 0 Comments

Unusual Trading VolumeThis week we’re going back to take a look at some very unusual options trading activity in Research in Motion (RIMM), Salesforce.com (CRM), and Terex (TEX).

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:

Research In Motion Options (RIMM)

Options in Research In Motion (RIMM)traded large volume on Monday. 

Even though the broad market is in the red today, we’re surprised that our tracking system is showing unusual call spread buying in what has become a very unpopular name.

Europe is still dealing with their issues.  And domestic data this morning was mediocre at best. 

It’s obvious that shares in Research in Motion are at eight year lows following last week’s earnings announcement.  And one trader is looking for a turnaround within the next several months.

In early trading, RIMM is up fractionally at $7.50 a share.  But the largest volume this morning is concentrated on two different call strikes.

The first is the RIMM March $9 strike call options.  In the first few minutes today, this strike traded over 3,000 contracts at an average price of $1.08.

The other RIMM option is the March $11 strike calls.  Right after the purchase of the 3,000 contracts of the March $9 strike, 3,000 contracts of these were sold for a price of $0.61.

Making this trade a RIMM March $9 – $11 call spread for a price of $0.47.

So, if RIMM closes March expiration above $11 a share, this trader stands to make a whopping $459,000 on his $41,000 investment.

Not too shabby!

Don’t forget, 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 in order to reduce a trader’s option premium he has to pay, as well as to define his risk.

So, the question is, why so many call options on this troubled name?

As most of you know, Research In Motion designs and markets wireless handsets, software, and services.  

RIMM’s primary revenue driver is the sale of handsets to carriers worldwide that promote the company’s BlackBerry line of devices.  In addition, the company generates access service fees from carriers for each BlackBerry subscriber.

Here’s the thing…

After getting beaten down heavily over its last earnings report, RIMM’s now putting in a short term bottom.  And if we see any type of short covering rally over the next few months, RIMM will likely trade in lockstep with the overall market.

What’s more, the company plans to announce even more layoffs beginning as early as August 1st. 

And when a company announces layoffs, the cost savings go directly to the bottom line.  As a result, this usually gives the stock a short-term bounce.

But most importantly, there are now rumors of take out talks by another mobile device operator.

And I think this is exactly what options traders are betting on here.

If I’m right, this trader will be seeing a lot of vacation money coming his way.

Salesforce.com Options (CRM)

Options in software services company Salesforce.com (CRM) showed larger than normal activity Wednesday.

Don’t forget, even though this is a short day with light trading, stocks are still moving.  Not everyone has taken off yet for the beach to celebrate the Fourth of July holiday it would seem.

And while Salesforce.com is moving slightly higher in today’s trade, at least one trader remains a little nervous.

Our tracking system has detected a large amount of trading in CRM’s long-term January 2014 put options.

That’s right, January 2014!

So, with CRM trading at $141.09, what are traders positioning for?

Simple… they’re betting on a big drop in CRM shares by buying put spreads. 

For those of you who don’t know, a put spread is a bearish option strategy.  It involves the purchase of a put option and the instantaneous sale of another put option at a lower strike.  This strategy gives the trader an opportunity to make a nice profit while limiting his risk.

In this case, the trader is buying the CRM January 2014 $120 – $85 put spread.

Right out of the gate today, this spread was bought 2,100 times for an average price of $12.70. 

Sounds expensive, but with so much time until expiration, this $2,667,500 investment can turn into a $4,683,000 gain.  That’s a maximum profit of 176% if CRM trades down to $85 by January 2014.

What’s interesting here is that this trade was made by a very disciplined trader.  He’s not looking for a home run.  Just a double over a long time horizon.

So, what’s behind this bearish put spread?

As most of you know, Salesforce.com provides cloud computing and social enterprise solutions to various businesses and industries worldwide.

The company delivers customer relationship management applications through the internet or the cloud.  And its cloud computing services enable customers to connect, engage, sell, service, and collaborate with their customers.

It all comes down to this… The company has its problems.

Salesforce.com could be squeezed by competition from Oracle (ORCL) and SAP (SAP) for large business customers and Microsoft (MSFT) for small to mid-size business customers.

Also, the market for CRM’s software as a service is young.  In other words, competition is likely to intensify as numerous competitors are entering the space to grab a portion of the potential profits.

But here’s the key…

I think this large put activity is due to analysts’ poor expectations for upcoming earnings and a possible continued weakening in the technology sector.

Terex Options (TEX)

Options in heavy equipment maker Terex (TEX) lit up our tracking system Tuesday afternoon.  And the higher than normal activity is continuing today.

What’s going on?

Terex has successfully bounced off of the bottom of its range, and at least one investor is looking for a rally to ensue.  In fact, options activity in TEX over the last few weeks has been about 4 times more than average.

Terex rose almost 1% to $18.60 on Tuesday, and it’s up another 1% this morning.

Even though TEX doesn’t report earnings for a few weeks, option traders are starting to position themselves early.  It looks like they’re trying to take advantage of lower than usual volatility in this name.

You see, the lower the volatility, the lower the cost of the options.  As a result, large option traders can pick up big blocks at cheap prices.

And one option trader clearly wants to take advantage of the situation.

Just before the close on Tuesday, our radar picked up a block trade of 3,100 contracts of the TEX August $19 call options.  They traded at an average price of a mere $1.30 a piece.

The trade is clearly a bullish call on TEX.

Let’s not forget that straight call buying with no other positions is a speculative play with unlimited upside potential.  Of course, the shares must move higher for the trade to turn a profit.

But with TEX already closing in on the strike price, this trade could definitely wind up paying off in a big way.

So, why make this trade right now?

I’ll let you know exactly why in just a moment… but first, a few words about this fascinating company.

If you don’t already know, Terex manufactures a wide variety of heavy construction and materials processing equipment for customers all over the world.

The company’s strongest focus is on equipment such as cranes, aerial work platforms, and rock crushers.  But TEX also produces a line of compact construction equipment, which includes track loaders, backhoes, and mini-excavators.

While TEX is based in the US, they sell two-thirds of their equipment overseas. 

Now, what is this trader thinking, especially with all the overseas turmoil?  

Here’s what he likely sees in TEX…

Outside of its construction segment, Terex sells its products directly to customers without the use of dealers.  As a result, they don’t have to bear the cost of an extensive dealership retail network like that of Caterpillar (CAT).

What’s more, the company’s aiming to utilize these relationships to promote sales of their compact construction products into this business line as well.

In addition, with building starting to pick up in emerging markets, TEX has improved its cash flow.  So this now provides Terex with some financial flexibility to reduce leverage on its balance sheet.

Bottom line… TEX has a lot going for them.  And I believe this call position is a very smart play.

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.