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I am relatively new to options, however something has caught my eye. I see this case of a single leg deep out of money HES Aug 10 call option with a very large transaction of 4,373 contracts completed at the Ask price with bid ask spread of 0.10/0.16, underlying is $64 with a strike at $75, on a weekly option set to expire 20 days from now. Prior to today, that particular option/strike had 0 open interest. Below is the time and sales of the transaction: enter image description here

The overall volume and present open interest for that dated option is: enter image description here

As well as the general chart, we can see the price in the last year has never breached $75:

enter image description here

I am curious as to the rationale behind an investment such as this, given they stand to lose a potential ~$69,000 on something that looks like a big gamble?

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    Are you sure this is not part of a bigger transaction with positions short and/or at different dates or strike prices ? Those would be part of a strategy (e.g. butterfly, condor..). These generally reduce the initial investment and modulate the payoff patterns. Look for an equally large transaction at different strike prices, maturity dates and "side" of the transaction (seller instead of buyer). – ApplePie Jul 21 '18 at 0:19
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    "Prior to today, that particular option/strike had 0 open interest." After trading 7,809 contracts today, what's the EOD Open Interest? If zero, what do you think that means? What do you think the investor/trader's overall market position is if these were calls bought? – Bob Baerker Jul 21 '18 at 0:19
  • @BobBaerker, concerning the open interest, I will check Monday as the lagging indicator will be populated then – Sauron Jul 21 '18 at 0:37
  • @ApplePie, I did notice high volume, not nearly as high as this only 3,711 on the Aug 3 yesterday, but not a single large transaction, all on the ask small transactions, same idea no previous open interest, and appeared to be all buy to open given on the ask – Sauron Jul 21 '18 at 0:49
  • @ApplePie, is that a fair assumption to make? that the Aug 3 were also Buy to Open, given on the ask? – Sauron Jul 21 '18 at 0:57
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There are people who go to Vegas with more money that you'll make in 10 years. Sometimes they win, sometimes they lose.

A gambler believe that Hess will pop, maybe on earnings, maybe on insider info. If it goes to $80, their 16 cents is worth $5. 31X their money. I don't know who that player was, but it doesn't take many wins to offset losses when the winning bets are 10X or more.

Last April (2017), I made a similar find. NSC, trading at $118, and a player bought a call spread, buying the $150 strike, and selling the $180 for a net $3.50/sh. But, those options were for January 2019. 21 months to go up 50% seemed more reasonable than 17% (more to profit) in 10 days.

I documented that trade in an article Norfolk Southern 2019 Call Spread. To be clear, I can afford the $3500 that bet cost. I'd be happy to 'win' 1 in 3 of such bets. And no, I don't call this investing. In my experience, the toughest thing about options is that you need to be right on the direction, the magnitude, and the timing. There's nothing like a trade where you only get 2 of the 3 right and the options expire worthless. And then a few months later, the price blows through your target.

  • "maybe on insider info", isn't that illegal? – Sauron Jul 21 '18 at 0:38
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    Yes. And large option trades are often a paper trail for the SEC to follow. If NSC blows through $180 due to a business deal the original trader knew about, he's in trouble. I, on the other hand, had no inside info, as the trades themselves are public. – JTP - Apologise to Monica Jul 21 '18 at 0:40
  • So if you saw that $69,000 option purchase and thought "I bet that's someone trading on insider knowledge" and bought $690 worth of options, that would be totally legal even if the first purchaser went to jail for insider trading? – gnasher729 Jul 21 '18 at 18:28
  • Actually, all I know is what’s public, and past trades, by definition, are public. Trading on price patterns or volume doesn’t need to take into account why those original trades occurred. I’ve never heard of an inside trader prosecution that went on to go after random small trades that followed. – JTP - Apologise to Monica Jul 21 '18 at 20:12
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You are making an assumption that because the transaction took place at the ask price then it is a bullish speculation on the part of the buyer. It's likely so but not necessarily true. Here are some alternate possibilities. I do not mean for them to represent actual or even logical trades but I'm merely attempting to demonstrate that there are other possible strategies at play rather it's simply a long call purchase that is speculating on a massive run up in the stock past $75 (or into the low 70's before expiration).

For the moment, let's put aside the size of the trade and the Open Interest and consider some hypotheticals.

The margin requirement for selling naked options varies from broker to broker. The B/A for the Aug 10th 70 call is $0.42 x $0.49 . Using one broker's online calculator, if you wanted to sell that call naked, the margin requirement would be $700.

1) If one also bought your Aug 10th 75 call for $0.16, this would create a BEARISH vertical spread and the margin would drop to $474 (difference in strikes less the premium received) and one would also have catastrophic protection in place. This is the opposite outlook than your bullish conclusion.

2) Or perhaps the trader also sold a BULLISH deep OTM put spread, creating an Iron Condor. Two credit premiums and you can't be wrong on both sides. He is NEUTRAL with a lot of room on either side of current price to be wrong.

Portfolio margin is a risk-based margin policy that aligns margin requirements with the overall risk of the portfolio. The Options Clearing Corporation utilizes a formula that sets the margin requirement to the maximum hypothetical loss of the portfolio. Standard Reg T margin is 2:1 and portfolio margin can bump that much higher (5:1 or more).

3) Suppose out trader has shorted shares of HES at the current price. His cash requirement to do so is 50% of the share price. But suppose if he buys your $75 put, his margin might be lowered to 15-20% (portfolio margin). He happens to now own catastrophic protection but he is buying those calls for the express purpose of reducing his margin requirement. He is BEARISH.

Now, back to your charts. Let's suppose that you are 100% correct in that someone bought 4,373 (or more) Aug 10th $75 calls at the ask price of 16 cents. Is he making a crazy foolish bet or does he know something? You found a large trade and the question is, "What does that do for your trading decisions?" My answer is nothing.

  • Thank you, and I believe it is a calendar spread as I also saw heavy volume the day before yesterday on the Ask at the Aug 3, $75 strikes, turned to open interest from previous open interest of 0. Not making any crazy $10-$15,000 bets on raw assumptions, just trying to get a handle on the market and varying strategies. Thank you for the additional perspective here. – Sauron Jul 21 '18 at 16:15

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