XLF, GOOG, WFC Options — Unusual Trading Activity — April 13, 2012

| April 13, 2012 | 0 Comments

Unusual Trading VolumeThis week we’re going to take a look at some very unusual options trading activity in Financial Select Sector SPDR (XLF), Google (GOOG), and Wells Fargo (WFC).

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:

Financial Select Sector SPDR Options (XLF)

Options in the Financial Select Sector SPDR ETF traded enormous volume Monday.  Our tracking system just kept flashing with put buyers.  Option traders bought multiple strikes across multiple months.

What’s more, they paid a lot of money for the premiums.

The largest volume was in the June contracts, which traded over 25,000 contracts.

The XLF has not been able to trade above $16 a share in over a year.  Now, with a possible market correction staring us in the face, option traders came in by the bus loads.

In early trading, the XLF was down 1.8% to $15.25 a share.

One of the top option trades Monday in the XLF was concentrated on the June $13 strike puts.

During the first three minutes of trading, one trader came in and purchased 10,000 contracts of this strike at a price of $.015 a piece.

This was a true speculative play with gigantic profit potential.  I mean, the XLF hasn’t seen this level since December 2011.  So, if it was to get there, this trade would be like winning the lottery.

However, there’s no doubt this option trader doesn’t think it’s out of the realm of possibility that with a nice size market correction, these options will have little problem increasing in value.

This guy sure is negative on the banks right now.

You see, since the XLF holds all of the financial-related names from the S&P, the big put purchase is an obvious bet against the big name banks.

As we’ve heard many times before, there can’t be a sustained market rally without bank participation.

And it’s clear this trader certainly agrees with that statement.

Personally, I hope he’s wrong.

Google Options (GOOG)

Options in the multi-billion dollar social media company Google showed heavy activity Wednesday.

However, this was to be expected as traders patiently awaited the news…

That’s right, Google reported first quarter earnings after the close of trading Thursday. 

So, how did option traders set up for this event?

Traders consider this report important because they know it’s going have a profound impact on the other big cap tech stocks due to report over the next few weeks.

Our tracking system calculated the premium built into the GOOG options suggested a $44 a share swing in either direction. That’s a 7% move for Google.

As I wrote, Google was trading at $630 a share.  And option traders were starting to pile in.

You see, one trader Tuesday initiated a $625-$640 call spread in GOOG.  Obviously he thinks this stock’s moving higher.

Remember, a call spread is an option strategy where one call option is purchased and another option 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 a trader’s risk.

Meaning, with a spread, an option trader can’t lose more than the difference in the strikes minus what he paid for the position.

Knowing this, Wednesday we saw one trader come in buying the April $625 call options and selling the $640 call options.  He made this trade 1,200 times for $6.00 a share.  This was a total cash outlay of $720,000.

Now, all this trader needs Google to do is trade above $640 a share before April expiration.  If this occurs, he better have big pockets!  He’ll not only put his initial $720,000 back into his pocket, he’ll also make an additional $1,080,000 profit.

So, after this trader’s initial trade Tuesday afternoon, other option traders started jumping on the bandwagon.  We’re also seeing the same trade being made again Wednesday morning.

As most of you know, Google is a technology company.  It maintains Web sites and other online content for users, advertisers, and Google network members.

With Google providing so many services, option traders think this company is poised higher.  Let’s not forget, before the infamous market crash that started in 2008, Google was trading at $740.

And it could easily see this price again soon. 

In other words, right now GOOG is undervalued by most analysts.  What’s even better, Google’s water faucet of cash is allowing them to focus on providing new and significant opportunities for growth.

Finally, Google’s rise in the smart phone market share through the Android platform is helping to extend their advantage in the mobile world.

I believe option traders who think Google is going higher are going to be rewarded very soon.

Wells Fargo Options (WFC)

Options in mega bank Wells Fargo showed heavy activity Thursday.

You see, for the next few weeks, our multiple screens are going to be flashing red and green faster than you can blink.  The reason, earnings season is underway!

Earnings season is like Christmas for option traders.

Volatility spikes and stocks could see large swings up or down.  And in the weeks ahead, if option traders make the right decisions, they can easily make hefty profits.

So, with Wells Fargo reporting earnings this morning, how did option traders set up to profit?

Technically, this bank has been in a very defined range.  Since the beginning of 2012, WFC has traded between $30 and $32 a share.  Then in March it spiked, before settling in a new range between $33 and $34 a share.

Now option traders are ready for another leg up…

Thursday morning, WFC was trading right at the top of its range at $33.65.

And option traders loaded up the truck on call options.

During the first hour of trading, we saw 15,000 contracts change hands.  The bulk of the volume was concentrated around the April $33 and $34 strikes.  These two strikes account for 13,000 of the calls.

It’s obvious that option traders weren’t concerned with a big sell-off.  If they were, we would’ve seen them buying spreads.

Meaning, option traders are just taking straight out positions for unlimited upside gains.

But why are they so hyped on this name?

Wells Fargo is one of the four largest banks in the United States.  By the end of 2011, they had $1.3 trillion in assets.

The company is split into several segments… Community Banking, Wholesale Banking; and Wealth, Brokerage, and Retirement.  The company is also a major player in the residential mortgage market, servicing $1.8 trillion in loans.

Although we’re seeing huge option activity mainly because of its pending earnings announcement, there’re some other reasons this stock could be poised higher…

Recently, Wells Fargo announced a quarterly dividend increase from $0.12 to $0.22 per share.  And given some analysts near-term earnings forecasts, they think WFC could possibly raise its quarterly dividend again to $0.35 per share by the end of 2013.

People love high dividend yielding stocks right now!

In addition, by avoiding the worst lending mistakes of its peers, Wells Fargo has positioned itself in an excellent position to gain even more customers and create value as the economy recovers.  This could translate to a possible acquisition by WFC or even the sale of Wells Fargo to another big bank.

Either way, when Wells Fargo reports this morning, option traders will be looking for the stock to move higher.

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.