TRV, BAC, XLK Options — Unusual Trading Activity — September 21, 2012

| September 21, 2012 | 0 Comments

Unusual Trading VolumeThis week we’re going back to take a look at some very unusual options trading activity in Travelers (TRV), Bank of America (BAC), and SPDR Select Technology Sector Fund (XLK).

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:

Travelers Options (TRV)

Options in big-cap insurance company Travelers (TRV) lit up our tracking system all last week with a large amount of unusual trading activity. 

And last Friday was no different. 

TRV call options are on the move.

Travelers has traded in a tight range since the beginning of the year.  It has only moved between $58 and $60 a share.  But now it has broken out of its range and is heading higher. 

And option traders are betting it will keep climbing. 

In today’s market, Travelers is holding up well, currently down only $0.06 to $68.52. 

Like kids in a candy store, option traders bought a heavy amount of call options on Friday.

They especially had their eyes on the TRV January 2013 $70 strike call options for a mere $1.70 per share.  And with the stock trading only two points out of the money with four months to go, this is a high probability bet.

On Friday afternoon, we saw a single block trade of 1,200 contracts… well above the normal volume.

And while the trade is a mere $20,400 bet, it has big profit possibilities.

By buying these calls naked (without any corresponding stock or other options), traders have unlimited upside potential.  They stand to cash in nicely if TRV trades above $71.70 by January expiration.

What’s more, when we see heavy call buying spread across not just this strike, but many strikes, it usually indicates positive sentiment.

In other words, it shows that multiple traders have the same feeling about the stock’s potential to rise.

Now, if you don’t already know, Travelers provides various commercial and personal property and casualty insurance products and services to businesses, government entities, associations, and individuals.

As I said before, TRV has been trading in a tight range for a long time.  So, what’s causing this sudden burst in option activity? 

Since there haven’t been many news headlines or press releases on the stock lately, I think it’s the company’s general business model that is fascinating traders.

Travelers fared well through the financial crisis, and its relative strength has helped it outperform many of its peers.

In addition, Travelers’ newly formed direct-to-consumer initiative may boost growth in the future.

Finally, analysts are looking ahead this year.  They believe that premium growth should accelerate if the economic recovery continues to gain traction.

Their forecast is for modestly higher premiums in coming periods.  And an increase in demand for commercial insurance products will show right on top line revenue.

Bottom line…

It’s obvious a number of option traders think Travelers has broken out of its stagnant range and is poised for more upside.  We’ll wait and see if they’re correct.

Bank of America Options (BAC)  

Options in the controversial Bank of America (BAC) saw a flurry of option activity Monday and a follow through into this morning. 

Bank of America stock closed down Monday and is down another 1.0% this morning to $9.20, on its long way back from under $5.00 a share just a few months ago. 

Over the last few months, BAC options have been amongst the most active across any other single stock, with close to $1 million contracts trading hands each day.

And today seems like it’s going to be no different.

By simply looking at the option chains, it’s obvious that most option traders are still bullish on this bank.

Just early this morning, as a market correction seemed to be taking shape, one option trader purchased an enormous block of call options. 

Let’s see which ones…

This trader zeroed in and purchased 16,000 contracts of the BAC October $9 strike call options for an average price of $0.50. 

This puts his overall investment in this trade at a whopping $800,000.

And with no other option trade associated with this block, his earnings potential can go to the moon!

I’m even thinking about jumping on board this one, the risk is limited and reward is unlimited.  Not bad.

So, what about the company?

As you all know, Bank of America provides various banking and financial products and services to individual consumers, small-and middle-market businesses, and institutional investors.  The company also services corporations and governments in the United States as well as internationally.

While Bank of America needs more capital to comply with Basel III, it has the time and earnings power to do so without turning to the equity markets.  This is certainly a catalyst for the stock to remain elevated for the long-term.

In addition, many of Bank of America’s past problems were a result of poor capital allocation decisions. But now, the company’s size, coupled with increased regulatory scrutiny, has reduced this risk going forward.

And lastly, advances in information technology may finally make a universal banking model not only achievable, but also preferable in the eyes of consumers.  Remember, on-line banking is the wave of the future.

In the meantime, we’ll wait and see.  This option trader obviously believes BAC is poised higher sooner rather than later.

SPDR Select Technology Sector Fund Options (XLK)

Options in the SPDR Technology Select Sector SPDR ETF (XLK) experienced an enormous amount of unusual trading late Tuesday afternoon.

The stock closed up fractionally at $31.63, with gigantic options trades made on the bullish side. 

One such trade was made just after mid-day. 

An option trader came in and made the largest option trade on the XLK in months.  The purchase he made was on straight up calls.  This bullish strategy is made by buying one call option with no other options associated with them.  This gives the trader unlimited upside profit potential. 

In this very aggressive trade, the trader bought just under 50,000 contracts of the XLK September $31 strike call options for an average price of $0.60.  And with only three days left until expiration, these options will now start moving dollar for dollar.

So, the total investment on the trade is $3,000,000.  That’s a few bucks!

However, I believe this is a really cheap way to make a short term bet on a sector that has been on fire along with the rest of the market.

In addition, according to our tracking system, this trade carries a greater than 75% probability the trader will earn at least some profit.

But why such a short-term bet on technology?

For those of you who don’t know, XLK is an ETF.  Its largest holdings include stocks like Apple (AAPL), Microsoft (MSFT), IBM (IBM), and Oracle (ORCL).

It seems clear that yesterday’s huge trade on the XLK comes on the heels of the major move this sector has experienced over the last few months. 

All of the major stocks in this ETF are up considerably, especially Apple.  And it seems there’s no stopping it.  Actually, during the last few months, it seems most of these stocks have been in a major uptrend.  

So, with the technology sector at a key technical point, option traders think it’s the perfect time to exercise a little aggressive behavior.

It’ll be interesting to see if they’re 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

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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.