XLI, DELL Options – Unusual Trading Activity – February 1, 2013
This week we’re taking a look at unusual options trading activity in the Industrial Select Sector SPDR (XLI) and Dell (DELL).
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:
Industrial Select Sector SPDR Options (XLI)
Option activity on the SPDR ETF focused on the industrial sector exploded this morning in a burst of unusual option trading activity.
Open interest on the June 2013 $38 puts was just 2,401 contracts coming into today. But 10,000 of June 38s have already traded hands this morning. The activity was led by single print of 8,250 June $38 puts for 91 cents.
XLI is currently trading for $40.48 per share. The ETF is up 24% from the 52-week low of $32.48 and it’s currently just below the 52-week high of $40.91.
The industrial sector ETF has found support around $40.16 and resistance in the $40.82 range. But the technical indicators are largely bullish. So this trader is betting on a reversal of fortunes for XLI.
The outright purchase of puts is a bearish bet on XLI. In order for him to breakeven on the trade, XLI will need to fall nearly 10% to $37.09 by June option expiration.
Is this a good trade?
Look, if you’re inclined to make a bearish bet against this red hot market, buying put options is much better than outright shorting XLI.
Don’t forget, shorting a stock comes with unlimited risk. But buying a put option allows the trader to define the amount of risk he’s willing to take.
In this case, the trader bought 10,000 puts for 91 cents. He controls 1 million shares of the stock at a cost of $910,000. And that’s the most he can lose.
But if the trader had shorted 1 million shares of XLI, he would have needed $40,480,000 in capital. He could lose $910,000 on a small 2% rise in XLI’s price. And theoretically, he could lose all $40 million and even more if the price continues to go up.
One thing’s for sure, this is a very large trade. And the put buyer stands to make a lot of money if XLI takes a nosedive over the next few months.
Dell Options (DELL)
Speculation that PC maker Dell will be taken private has sparked investor interest in the stock and call options over the last few days.
DELL is currently trading for $13.79. The shares are up 60% from the 52-week low of $8.62 but the shares are well off the 52-week high of $18.07.
According to a report for Reuters, a buyout could come as soon as Monday.
The bid for the company is coming from Silver Lake Partners private equity group and headed up by Dell founder and CEO Michael Dell. The deal is reported to be worth $15 per share.
To a large extent, option traders have been buying the February and March $14 calls. But there has also been an uptick in activity on some February and March $15 calls as well.
Since the deal is expected to go off at $15 per share, traders are likely buying the $14 strikes and selling the $15s to reduce their cost. Right now, buying the Dell March $14 / $15 bull call spread costs 29 cents.
The breakeven is $14.29. If DELL is below $14 when the option expires, the spread will expire worthless and you’ll be out the $29. The maximum profit of $71 comes if DELL is at or above $15 at expiration.
If Dell is taken private for $15 per share, the trader will make a profit of 244% on these spreads. However, if the deal doesn’t get done, they’ll likely lose their entire investment.
In other words, traders are hoping for a deal to get done soon. And as far as I’m concerned, Dell should be taken private. The PC industry is dead and Dell is in need of a major facelift. And that’s easier done when the company is owned privately.
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
Category: Unusual Options Trading Activity
