XLF, HOT, MSFT Options — Unusual Trading Activity — June 15, 2012

| June 15, 2012 | 0 Comments

Unusual Trading VolumeThis week we’re going back to take a look at some very unusual options trading activity in Financial Select Sector SPDR (XLF), Starwood Hotels & Resorts Worldwide (HOT), and Microsoft (MSFT).

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 (XLF)traded the largest volume of 2012 Monday morning.  Our tracking system is lighting up with call buyers. 

Option traders are concentrating their buying on the June and July $14 and $15 call options.

Just over the last few trading days, option traders have spontaneously changed their tune from put buying to call buying.

What’s more, since the Volatility Index is down today, traders aren’t paying a lot of money for premiums.

In early trading, XLF is flat at $14.12 a share.

The largest volume is on the XLF June and July $14 and $15 strike call options.  These contracts have already traded an eye-popping 22,000 contracts this morning.  The price paid was an average of $0.13 a share.

Remember, straight call buying is a strategy that’s used without any other options when traders believe a stock is going to see a significant rise in value.

I think more investors are getting bullish on the US banking sector. 

And the more I think about it, this makes perfect sense.  Some of the most important domestic data has now been released.  And from here on out, the lack of bad news will be viewed as good news.

You see, a lot of it comes down to the Spanish banks. 

Many investors think that even though the government could’ve just backstopped the Spanish banks, a bailout would be good enough.

Meaning, a backstop is simply like a guarantee that only a certain amount of money will be lost.

A bailout is the process of the government injecting money that in reality could be gone the next day.

So, obviously a backstop is safer for the average investor.

In addition, I think this will trickle over to a stronger US banking sector.  The Spanish bailout should become rocket fuel for US banks within the next few days.

When you shore up one bank, usually the rest of the solid banks will follow suit.

So, why buy these particular strike prices?

With a market correction possibly winding down, option traders believe XLF could be at a bottom.

It has now moved above the 200-day moving average of $13.73 per share.  And XLF could easily move higher as the strength of the economy and the global banks increase.

In addition, premium in XLF is so cheap, option traders can’t afford not to take a shot at buying these inexpensive calls.  This could ensure a huge winner at the end of the day.

So, there’s no doubt these option traders are positive on the banks. 

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

Starwood Hotels & Resorts Worldwide (HOT)

Options in mega resort hotel company Starwood Hotels & Resorts Worldwide (HOT) showed a large amount trading activity Tuesday.

Just as we thought the market might be showing signs of a reversal… Bam!  The Dow dropped 150 points and the S&P 500 shaved 17 points as most investors expected a positive day.

One stock that was especially weak was HOT, down over 3.5% to $50.22.  Not only that, HOT has fallen 10% over the last month.

And as the market continued declining unexpectedly, we saw one option trader make a large bet that Starwood Hotels will continue its down trend.

Midday Monday, this trader came in and purchased 6,400 contracts of the HOT August $45 strike put options for an average price of $1.80 a piece.

The trade cost him a hefty $1,152,000.

This option trader must have a strong conviction that Starwood Hotels is going to move substantially lower.

And by purchasing these put options without an offsetting trade, he has unlimited upside potential.  If he’s right, he stands to make a serious amount of money.

As a professional options trader, I wouldn’t hesitate at all to make this same trade.

It seems clear that this huge trade on HOT comes on the heels of some disturbing headwinds this company is now facing.

During 2009, Starwood’s stock had a five-fold increase.  Since this lodging recovery is suspected to be fully priced into the stock, shares are said to now be fairly valued.

Starwood’s timeshare division is an unattractive business relative to its franchised hotel operations. The timeshare industry is mature, cyclical, and generates relatively low returns.

Company shareholders would benefit from a sale or spin-off of this division before the stock moves substantially lower.

Most importantly, HOT has a significant amount of debt on its balance sheet.  This would certainly amplify the negative effects of any additional economic downturn.

At least one option trader seems very concerned. 

Microsoft Options (MSFT)

Options in mega software company Microsoft (MSFT) lit up the options radar in a big way Thursday morning.

It seems “Mr. Softy” is drawing a lot of positive attention from investors.  In fact, options activity in MSFT over the last week has been about 5 times more than average.

What’s going on?

Despite reporting great earnings in April, the software giant’s stock has suffered a huge pullback over the last few weeks.

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

Ten seconds after the opening bell, our tracking system picked up a block trade of 10,000 MSFT July $29 call options.  They traded at an average price of $1.01 a piece.

This is what I call a sound, calculated bet.  You see, with only a month until expiration and the option at the money, the probability of this trade returning a profit is close to 60%. 

But why so much call activity?

I’ll get to that in a moment… but first, let me say a few words about the company.

As I’m sure you know, Microsoft develops the Windows PC operating system, the Office suite of productivity software, and enterprise server products.

The Windows PC and Office franchises collectively account for nearly 60% of the firm’s revenue, and the server and tools business contributes 24%.

The rest comes from the firm’s other businesses, including the Xbox 360 video game console, Bing Internet search, business software, and software for mobile devices.

Now, getting back to today’s unusual call buying…

As I said earlier, this trader is trying to take advantage of the pullback in Microsoft shares amidst the recent broad market correction.  He probably believes a couple of upcoming events will act as positive catalysts for the shares. 

First off, Microsoft’s Azure platform is poised to develop into a larger business than their historical cash cows… such as Vista and Office.  Azure is the company’s revolutionary cloud computing platform.

Also, Microsoft’s partnership with Nokia (NOK) should drive large market share gains for the Windows Phone platform.  In fact, the venture should create the next $1 billion-plus annual revenue stream for the company.

Bottom line… MSFT has a lot going for them.  And I believe this large 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.