TOL, XOP, CHK Options — Unusual Trading Activity — September 14, 2012

| September 14, 2012 | 0 Comments

Unusual Trading VolumeThis week we’re going back to take a look at some very unusual options trading activity in Toll Brothers (TOL), SPDR S&P Oil & Gas Exploration & Production (XOP), and Chesapeake Energy (CHK).

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:

Toll Brothers Options (TOL)

Options in home building company Toll Brothers (TOL) experienced unusually high volume during last Friday’s session.

Back on August 22, 2012, Toll Brothers reported solid fiscal third-quarter results.  As homebuilding unit deliveries climbed 39% year over year, average pricing ticked up about 1%.

What’s more, signed contracts also improved, with volume jumping 57% compared with last year’s third quarter.

Management said the firm is currently enjoying its best demand picture in more than five years, with the total value of contracts signed seeing increasing growth rates in each quarter of 2012 to date.

So, with this information coupled with TOL trading at multi-year highs, at least one option trader is apparently looking to profit from a further move higher.

According to our tracking system, as TOL was trading at $33.50 last Friday afternoon, a trader came in and made a large bullish bet.

He bought 4,000 TOL January $32 strike put options for $2.34 and simultaneously sold 4,000 TOL January $35 strike put options for $3.80.

Of course, this is a credit spread, so the maximum gain comes with the stock anywhere above $35 at expiration.

In this case, the maximum potential gain would be the credit of $584,000.  Not too bad for a stock that is only $1.50 away from its strike price.

So, why is this trader betting on TOL?

As many of you know, Toll Brothers focuses on the high-end homebuilding segment of the market.  As such, it caters to customers whose annual incomes contain at least six figures. 

And it just so happens things are improving for the upper middle class.

A point made crystal clear by a statistic from the company’s sales figures for last year.  During 2011, TOL delivered approximately 2,600 homes at an average price of more than $500,000 from operations in 19 states.

But that’s only half the story…

Toll should continue to post major rebounds in sales and profitability going forward.  Housing demand is likely to begin normalizing soon after recently setting generational lows.

In addition, by focusing on the high-end consumer, Toll Brothers has an advantage over the competition.  You see, TOL benefits from growth and diversification opportunities not available to homebuilders that are more focused on first-time and move-up construction.

And lastly, TOL’s modest net debt of approximately $1 billion and toned operations provide investors with high visibility on the firm’s ability to succeed despite current weak industry conditions. 

Bottom line…

Visibility is one of the most important keys in playing the options market.  And it’s quite clear some option traders feel TOL offers some visibility (clarity) when it comes to their future earnings.

It’ll be interesting to see if they’re right!

SPDR S&P Oil & Gas Exploration & Production Options (XOP)

Options in the SPDR S&P Oil & Gas Exploration & Production (XOP) ETF showed a large trade on the bullish side at the end of Tuesday’s trading session.  

The ETF has recently climbed to a four-month high.  And this has at least one large trader looking for a big move up in the coming weeks.

XOP closed up 1.8% yesterday to trade at $56.19.  And for the purpose of this trade, it’s important to note the rally comes off a double bottom formed at support near $45 a share in June.

This is important because the trader does not see a scenario where the XOP trades back to its June $45 per share bottom. 

As a matter of fact, he sees this bullish uptrend in XOP continuing. 

Tuesday afternoon a trader came in and purchased a whopping 11,650 put contracts.  These contracts were the XOP September $50 strike put options at an average price of $0.57 a piece.

Then, in a staggering move, a minute later our detection system picked up the largest single block stock trade of the day.  Nearly 1,200,000 shares of stock were purchased at a price of $55.90.

So, what’s this trader’s strategy?

It appears he wants to be long the stock so that on a big move between now and September expiration, he can capture profits dollar for dollar on the way up.

However, what’s so crafty about this trade is that he drew a line in the sand by buying the put options.  Now, no matter what happens, he can’t lose money below $49.43 a share.  This is roughly 10% of the stock price over the next week and a half.

It’s obvious this trader feels quite comfortable with the risk/reward profile of the trade.  And so do I.

Now, what’s the story here?

This fund tracks the S&P Oil & Gas Exploration & Production Select Industry Index.

The index represents the oil and gas exploration and production sub-industry portion of the S&P Total Market Index.  It accounts for roughly 73 of the largest oil and gas production names.

The benchmark is an equal-weighted index and thus maintains higher turnover than market-cap-weighted funds.

If you’re bullish on oil and natural gas prices, then the SPDR S&P Oil & Gas Exploration & Production is the best way to gain equities-based exposure.

To further put your mind at ease, some of the biggest names that make up XOP include Exxon Mobil (XOM), Valero Energy (VLO), and Tesoro (TSO).

It all sounds good… but what else is contributing to this trader’s bullish position?

Simple, the fund is a low-cost way of gaining direct exposure to the most relevant companies in the US oil and natural gas exploration and production industry.  And it provides broad diversification, which is good for any portfolio.

In addition, XOP’s equally weighted portfolio offers a small-cap tilt.  And in this unbelievable market, small-caps have been in a serious uptrend lately.  Small-caps have been outperforming other equities in almost every sector, as they normally do in these large rallies.

So, it won’t be a real surprise to see XOP climb higher in this current market environment.

We’ll wait and see if this bottom calling will turn into large profits.

Chesapeake Energy Options (CHK)

Options in controversial Chesapeake Energy (CHK) lit up our screen Wednesday with gigantic trading activity.

So far, 2012 has been a year of buy-outs, takeovers, and M&A activity.  And this month is no different.  This time the target company involved happens to be CHK.

Chesapeake Energy announced Wednesday a flurry of deals covering its Permian Basin, midstream, and various non-core assets, with expected cash proceeds of approximately $7 billion.

In the Permian, aside from its previously announced sale of producing Midland Basin properties to EnerVest, Chesapeake will be selling the northern and southern portions of its Delaware Basin assets to Chevron (CVX) and Shell (RDS.A) respectively.

The total proceeds from the three deals covering just over 1 million net acres and including 36 thousand barrels of oil will be approximately $3.3 billion.

Well, it’s obvious why option traders are excited… so what are they doing about it?

As the price of the stock remains steady on this news at around $20 per share, options traders are a bit more optimistic in the short-term future. 

However, it’s not unusual to see traders take a shot at a stock moving higher after major selling news as we’ve been seeing in this name.

So, what our tracking system picked up yesterday is a large amount of call buying in the CHK September $20 strike calls.  As a matter of fact, over 10 times normal volume traded just yesterday.

On this strike, just over 20,000 contracts have traded hands.  They traded in a few large blocks at an average price of only $0.30 a share.  This puts the total investment capital at $600,000, with unlimited upside potential above $20.30 a share come September expiration.

That’s some trade!

But, what else is contributing to this unusual amount of call activity?

If you don’t already know, Chesapeake Energy acquires, explores, develops, and produces natural gas and oil in the United States.

The company also offers marketing, midstream drilling, and other oilfield services while holding approximately 14.9 million acres of oil and natural gas producing properties.

Even though CHK has had its troubles lately… it just has too much going for it.

Chesapeake’s large land positions in almost every major US region should support considerable production and reserve growth for a long time to come.

In addition, Chesapeake seems to be continuously resilient.

And these joint ventures will help the company ramp up its drilling and completion activity at relatively low cost.  Of course, this will help by adding revenue directly to its top line.

Lastly, with US natural gas prices likely to remain depressed for the next few years, Chesapeake’s shift to a more liquid rich portfolio should help improve CHK’s overall economic profile.

So, with all of this M&A news coupled with their strong foundation, let’s see if CHK will get a major boost in the next few weeks and watch our option traders make some serious money.

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!

***Editor’s Note***  Yesterday our friend and colleague Gordon Lewis added a stock to his Penny Stock All-Stars Portfolio that he thinks just about every investor should buy.  It’s a tiny company that has more cash in the bank than its entire market value… the kind of company Warren Buffett drools over!  Click here for more…

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.