RIMM, TBT, SCHW Options — Unusual Trading Activity — June 1, 2012

| June 1, 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), ProShares UltraShort 20+ Year Treasury ETF (TBT), and Charles Schwab (SCHW).

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 for Research in Motion (RIMM) traded large volume this Tuesday morning.

Even though the broad market is in the green today, our tracking system is surprisingly showing unusual call buying in what has become a very unpopular name.

Earnings season is winding down, European issues are still in unrest, and domestic data this morning was mediocre at best.

In turn, we now must switch our focus to news driven events when it comes to option trading.

In early trading, RIMM is up 3% at $11.35 a share.

The largest volume this morning is concentrated on two different call strikes.

The first is the RIMM June (weekly) $12 strike call options.  This strike has, in the first few minutes today, traded over 2,800 contracts at an average price of $0.11.

The second most heavily traded RIMM option is the regular June expiration $12 strike calls.  These have already traded over 2,600 contracts at a price of $0.41.

Don’t forget, straight out call buying is a strategy used when option traders believe a stock is headed substantially higher in the short-term.

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

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

RIM’s primary revenue driver is the sale of handsets to carriers worldwide that promote the company’s BlackBerry line of devices.

In addition, RIM generates access service fees from carriers for each BlackBerry subscriber.

Now, I think that after getting beaten down heavily after its last earnings report, a short term bottom may be in.

In addition, if we can mount any type of short covering rally over the next few weeks, RIMM will trade in lockstep with the overall market.

However, what’s even more important is that Research in Motion plans to announce 2,000 layoffs beginning as early as June 1st.

They currently carry 16,000 employees, so this represents an elimination of 12.5% of their total workforce.

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

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

ProShares UltraShort 20+ Year Treasury Options (TBT)

Options in the ProShares UltraShort 20+ Year Treasury ETF (TBT) showed some large activity Wednesday.

Before I jump into today’s trade details, let’s go through a quick refresher on TBT.

The ProShares UltraShort 20+ Year Treasury ETF is used by investors who believe yields on long-dated treasury bonds are poised to move higher.  And since bond prices move inversely to their yields, TBT buyers are also expecting long-term treasuries will drop in price.

You see, when long-term treasury bond yields rise and prices fall, TBT increases in value.

One more quick fact…

Many investors buy TBT because they think moves by the Federal Reserve to pump liquidity into the financial system will result in higher inflation.  And in turn, higher inflation will lead to a sinking dollar and rising bond yields.

History has shown a weak dollar is correlated to higher bond yields.

This thinking most likely explains why an option trader came in this morning and purchased 3,500 TBT June $16 – $17 call spreads.

More specifically, the trader purchased 3,500 TBT June $16 strike call options for $0.40 a share.  And he simultaneously sold an equal number of TBT June $17 strike call options for $0.13 a share.

The net cost to create this spread was $80,500.

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 upfront premium as well as to limit risk.

So, what’s the potential gain on this trade?

It’s the difference between the strikes minus the amount he paid for the trade.  In this case, the trader paid $0.27 a share and can profit $0.73 a share or $255,500.

Not a bad risk reward!

But why execute this trade now?

The first answer a trader gives when asked this question is the popular, “rates just can’t go any lower.”

Well let me tell you something… they most certainly can!

However, it’s not likely they’ll fall much more from here.

I have a strong hunch this is why option traders are starting to position these types of trades with TBT.

Here’s why…

This ETF provides an easy way for investors to gain exposure to the long-dated US Treasury market.

And, more importantly, treasury rates are the lowest on a historical basis.   Meaning prices are at historical highs.  When this turns, TBT will skyrocket.

So, with the European crisis close to stabilizing one way or another, option traders will be ready to pounce on the probability that bond yields will begin to increase.

Charles Schwab Options (SCHW)

Options on brokerage giant Charles Schwab (SCHW) lit up our tracking system Thursday morning with a large amount of trading activity.

But before I jump into the details, let me say this…

The market’s recent action is enough to give anyone a headache.  What’s worse, there’s no one to give investors a clear opinion on what they think about investing for the short-term or long-term.

And how can they?

May has turned out to be a record breaking month… and not in a good way.

First off, there haven’t been two back to back days in May that have closed in the green.  This alone is hard to fathom.

What’s more, the market has only been up a total of four days for the entire month.  It’s the first time this has happened in any month dating all the way back to 1974.

And this is why it makes it so confusing and frustrating for investors and traders alike.

Now, let’s get back to this morning’s large options trade…

With Charles Schwab trading down 1.2% today at $12.27 a share, one option trader came in and purchased 2,700 call options at $0.50 a piece.

The trade cost him a total of $135,000.  And since he executed this speculative trade without using any other options or stock, he now has unlimited upside potential until June expiration.

What’s so appealing about this stock?

As many of you already know, Charles Schwab is best known for its discount-brokerage business.

Since its beginning, the firm and founder have spread the gospel of cheaper cost investing.

And today, Schwab remains a major force in personal investing.  The company boasts a large network of brick-and-mortar brokerage branch offices.  And their online investing platform is preferred by millions of investors.

But these days Charles Schwab is about much more than just the cheap trade and the “talk to Chuck” motto.

Schwab’s recent earnings have primed SCHW for a boost once the Federal Reserve starts raising rates.

The company just acquired on-line trading platform, optionsXpress.  This will give SCHW a stronger position in its profitable segment of the online-trading business, especially its options investing.

In addition, Schwab’s scalable pricing model should enable them to pocket higher profits as revenues continue to grow.

But here’s the most important part…  the chart. 

Schwab is one of the few financials that has been able to hold support near its 200-day moving average during the recent sector-wide bloodbath.  The stock’s resilience during this downturn is a good sign it will outperform when the market starts moving higher again.

No wonder traders are positioning for a strong upside rally.

Best of all… it’s an inexpensive way to take this positive information and run with it.

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.