China Yukai (CYD) - Multi Leg Bearish Spread

CYD manufactures medium-duty diesel engines in China. The stock is trading at ~ 14.96. You can see the LIVEVOL™ Pro Summary below.



The company averages 406 option contracts a day - with an hour to go in trading it has traded over 21,000 (that's not a typo). The Company Tab snapshot is included below (click the image to enlarge).



Essentially every contract went up in a three legged option trade. The day's biggest trades and Option Tab snapshots are included below (click either image to enlarge it).





The trade was almost entirely opening (see small OI per line in snapshot above):

Sell 7005 Feb 17.5 calls @ 0.30
Buy 7005 Feb 15 puts for 1.40
Sell 7005 Feb 12.5 Puts @ 0.20

Total outlay = 7005*100*(1.40 - 0.30 - 0.20) = $630,450.
Max Gain = 7005*100*(40) + 0.30 + 0.20)= $1,120,800 when stock is 12.50 or lower.
Max Loss. = Unlimited

A payoff diagram is included below (click to enlarge the image).



The bet is that the stock goes down to 12.5. A good way to analyze an "unorthodox" multi-leg option startegy is to break it up into two trades. Here's an easy way to look at this trade:

(1) Buy the Feb 15/12.5 Put Spread
(2) Sell Feb 15 Calls to pay for it

The Charts Tab snapshot below (click to enlarge) illustrates that the stock is at/near a high and may be what chartists call "toppy."



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Kongzhong (KONG) - Opening Size Call Buyer

KONG is a $400 million Chinese 2.5 G mobile interactive entertainment provider in China. The stock is up ~13% and IV30™ is up 23% as well. The LIVEVOL™ Pro Summary is included below.



The company averages 437 option contracts a day - already nearly 7,000 have traded just an hour into the day. 6,800+ have been calls - a 253:1 call to put ratio. The Company Tab snapshot is included below (click the image to enlarge it).



The Feb 12.5 calls are the action. Over 6,700 have been purchased on essentially no open interest (OI) - these are opening order purchases. The day's biggest trades snapshot and the Options Tab snapshot are included below (click either image to enlarge them).





The Charts Tab snapshot below (click the image to enlarge it) illustrates the stock move today, the vol increase and the unusually high level of option volume.



Vol is up on call purchases - the skew is changing shape from the classic volatility smile (smirk) to an upward curving smile. The demand for the calls is going up --> that means vol is going up. This is "irregular" but not "uncommon" when one line continues to trade on the offer.

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GAP Tea Company (GAP) - Call Accumulator Paying Up

GAP is a $355 million company in retail food. The LIVEVOL™ Pro Summary is included below.



The company averages 517 option contracts traded a day. With an hour and a half to go there have been nearly 3,000 contracts traded. Further, the call to put ratio is 101:1. The Company snapshot is included below (click the image to enlarge it).



The biggest trades of the day snapshot below (click the image to enlarge it) shows that someone is buying the Jan 12.5 calls (green color implies trading on the offer - i.e. probably customer purchasing). The Options Tab snapshot below (click to enlarge) shows that over 2,700 of these calls have traded.





The open interest (OI) in the Jan 12.5 calls is ~2100. However, the Level II snapshot below (click the image to enlarge) shows that this OI has been steadily growing of recent.



The OI started rising on 12/24. Looking at the Jan 12.5 calls on 12/24 on the Time & Sales Tab reveals that those orders were purchases as well. This implies that the 2700 traded today are new positions - adding to the current one. Note the purchasers paid 0.42 and 0.45 on 12/24. Today they are paying up to 0.50.



This is call accumulation paying up as the accumulation continues on a 101:1 ratio calls to puts. Note also the May 12.5 calls with OI of 1,324 jumped by 900 on 12/23 - these trades were also purchases from what I can see.

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Avalonbay (AVB) - Opening Bearish (lopsided) Straddle

AVB is trading ~85.16 today with IV30™ at 34. The LIVEVOL™ Pro Summary is included below.



The company averages 2,189 option contracts traded a day. In the first hour and a half of trading today nearly 3,300 contracts have traded. Further, 3,173 of those were puts (26:1 put:call ratio). The Company Tab snapshot is included below (click the image to enlarge it).



The day's biggest trades snap below (click image to enlarge) illustrates that the Apr 80 puts have been trading on the offer (green coloring is on the offer) over 3,000 times. You will note that the condition reads "Spread" which is in fact incorrect from the exchange. The exchange incorrectly marks a trade as a "Spread" if it has to adjust prices later. The trade went up against 85.40 stock (traded delta neutral) not against the 85.25 stock that the exchange originally reported. Thus, the incorrect condition from the exchange.



An easy way to see that this was not a spread is simply to go to the Options Tab. A snapshot of the Apr options is included below (click the image to enlarge). Since only 3,300 contracts in total have traded and 3,155 of Apr 80 puts traded - it obviously wasn't spread against any other options. The Options Tab snap also demonstrates that the OI (218) is much smaller than the trade volume (3,155); this was an opening position.



The Apr 80 puts traded 4.70 vs. 85.40 stock delta neutral (let's assume a 34 delta per the Options Tab). That is the equivalent of buying 2 puts and 1 call. Here is the calculation for the call purchase based on 85.40 stock purchase with puts:

Call = Put + parity + interest - dividend
= 4.70 + 5.40 + ~0.20 - 0.89
Call = 9.41

So the trade buys one straddle for 9.41 + 4.70 = 14.11 and one additional put for 4.70.

The straddle makes money at expo. if the stock goes above 94.11 or below 65.89. Since the trade also has a long put which makes money at expo. with the stock below 75.30 (80 - 4.70) this is a bearish bet. It also gets long vol, which is generally bearish.

The snapshot of the Charts Tab below fills in the rest of the picture. The stock has run from 69 to 85 in the last couple of months. Click the image below to enlarge it. Note you can also see the IV30™ (red line) relative to the HV30™ (blue line) on the bottom portion of the image.



This is a bearish bet on a stock with a $17 (25%) run up in recent months. Keep in mind AVB's business (Real Estate Investment Trust).

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3 Par Inc (PAR) - Takeover Rumors

PAR is a $500 million data storage company. You can see the LIVEVOL™ Pro summary below. The stock is up 10% and vol is up over 11% as well on takeover rumors.



The company averages 296 option contracts traded a day. In the first 2 hours over 1,000 have traded. You can see the Option Tab snaphot below (click the image to enlarge it). ~650 Jan 12.5 calls have traded (and ~50 Jan 10 calls) accounting for the majority of the volume today.

The OI on the Jan 12.5 calls is just 20 - so these are opening orders. It looks like someone is bidding up and buying these calls.



I am usually not a big fan of these "takeover rumors" as they seem too often to be utterly nothing. Having said that, the analysis coming from Barron's and it being so slow before the new year, I am compelled to share it briefly. You can read the story below from the News Tab (click the image to enlarge it). $20 price tag is thrown around.



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Taser (TASR) - Call Accumulater

TASR is trading ~4.32. You can see the LIVEVOL™ Pro Summary below.



TASR averages 502 option contracts traded a day - in the first hour it has traded over twice that (1,059). All but 12 of those contracts have been calls. The Company Tab snapshot is included below (click the image to enlarge).



The Options Tab snap below (click to enlarge) demonstrates that the calls traded are the Feb 5 and Feb 7.5 kind. The day's largest trades snap below illustrates that these were purchases. Note the OI - the Feb 7.5 calls are all opening order purchases (zero OI) and the Feb 5 calls traded more than twice OI. A deeper analysis of the Feb 5 calls shows that the existing 255 OI were also purchases, so all of these trades are opening order purchases.





Taking a further look at the order flow in TASR over the last month indicates a possible accumulation of OTM (out of the money) calls. The Level II pop up window for the Mar 5 calls and the Jan 2011 7.5 calls illustrates the OI charts. Both are increasing recently (and these are purchases for both lines).





In summary, including today there have been opening order purchases of Feb 5, Feb 7.5, Mar 5 and Jan 2011 7.5 calls. The Jan 2010 5 calls have similar order flow recently. That's opening OTM call purchases on at least 5 different lines in a $4 stock.

Take note, there is a some non zero chance that this is a call purchaser that is selling stock and using the calls as upside protection (i.e. Long Call + Short Stock = Long Put). This issue used to be hard to borrow - as of right now the option markets do not imply a negative rate (no longer hard to borrow). This means selling stock is less expensive for the shorts - so the idea of using calls with short stock as puts is less expensive.

There are three possibilities here: (1) Obvious opening order upside tip-off (2) Less obvious short interest using calls as puts (3) None of the above. You can check the short interest on TASR of late to try to decipher betwen (1) and (2).

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UPDATE: Chattem (CHTT) - Identifying Order in Flow in a Takeover

Dec 21st I posted this blog: Chattem (CHTT) - Identifying Order in Flow in a Takeover
Read the Original Post



I saw some "smartly" placed over flow in the Dec calls; the 70, 75 and 80 lines reeping $6 million in profits from the "surprise" CHTT take over by SNY.

So what? Well, how about this story available on the LIVEVOL™ Pro (News Tab) from M2 Communications (click the image below to enlarge):

"The SEC alleges that Nicolas Patrick Benoit Condroyer and Gilles Robert Roger, who reside in Brussels, Belgium, purchased hundreds of "out-of-the-money" call option contracts for stock in Chattem, Inc... Condroyer and Roger purchased the contracts in newly-opened U.S. option brokerage accounts while in possession of material, nonpublic information regarding the impending acquisition...

December 21, Condroyer and Roger immediately sold all of their options for illicit profits of approximately $4.2 million. The SEC filed insider trading charges against them the very next day."



It seems 70% ($4.2/$6) of that $6 million was in fact allegedly insider trading. Bad boys...

And who says watching order flow can't win?

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Old Dominion (ODFL) - Strangle Buyer

ODFL is a $1.3 billion motor transporter. You can see the LIVEVOL™ Pro Summary below.



The company averages 233 option contracts a day - today over 4,300 have traded. The Company Tab snapshot below (click the image to enlarge it) illustrates not just the increased volume, but that the ratio of calls to puts is 1:1. You can also see that the Net Premium is green (positive) - indicating purchases of options (vol).



The snap shot of the Options Tab below (click to enlarge) shows that essentially all of the volume has been the 2000 of the Jan 30/35 strangle (purchases). The OI demonstrates that the calls are all opening and the puts are at the very least, somewhat opening (compare OI to trade volume).



Taking a look at the Charts Tab (below - click to enlarge) starts to unveil the possible bet. The stock rose sharply a few days ago (from ~$29 to $33). This big move increased the HV10™ substantially (white line below). The IV30™ has increased slightly, but has not reached the vol level of the underlying (very short time).



The strangle payout looks like this (click image to enlarge):



Ultimately this is a 2000 x 100 x ($0.75 + $0.90) = $330,000 bet that the tsock trades above 36.65 or below 28.35 by Jan. expo. Alternatively, it is longvtega. Specifically [2,000($0.024) + 2,000($0.031)]*100 = $11,000 of vega.

This means in the near term, this bet wins $11,000 for each vol point increase (alternatively it loses $11,000 for each vol point decrease). With HV10™ at 58 and IV30™ at 50 - an immediate 8 point vol increase would yield ~$90,000 (note that vega is not constant nor linear - it is a function (not a number)). This is strictly an approximation, it is by no means highly accurate.

Either way, someone has laid down a delta neutral bet that vol and stock moves in ODFL in the relative near term.

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GSI Commerce (GSIC) - ATM Front Month Put Buyer

GSIC is a $900 million e-commerce operator. The LIVEVOL™ Pro Summary is below.



The company averages 466 option contracts a day. Today nearly 3,500 have traded. Further, all but 10 contracts have been puts. The Company Tab snap shot is included below (click image to enlarge).



The day's biggest trades and the Options Tab snap shots are included below (click to enlarge). You can see the Jan 25 (front month ATM) Puts are the action (3,280 traded). Note the small OI relative to the trade size - these are opening order purchases.





The snapshot of the Charts Tab (below) indicates a recent run up in the stock. The snapshot also illustrates how unusual this options volume is relative to the recent past (click the image to enlarge).



Some new large shareholders have been selling stock that was used in an acquisition of their company @ 23.50 through an offering. Other than that, I don't see a whole lot of news.

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Life Technologies (LIFE) - Vol Seller

LIFE is a $7.85 billion global bio-tech tools company. The LIVEVOL™ Pro Summary below.



LIFE averages 1,965 option contracts traded a day. Today nearly 14,000 have traded. The Company Tab snapshot is below. Note not just the volume but that it is equally distributed between calls and puts. Click the image to enlarge it.



The largest trade of the day is a sale of Feb 50/55 strangle @ 2.10 (1.35 in calls and 1.75 in puts). The snap shot below illustrates the trades - note also the vol level that was sold (~31). Click the image to enlarge it.



The snap shot of the Options Tab below demonstrates clearly that these are opening orders (both legs). I can see this by the size of the open interest relative to the trade sizes. Click the image to enlarge it.



This is an opening short vol position. The pay off of the short strangle at Feb expo is included below for reference (based on 5000 sold @ 2.05). Click the image to enlarge it.



If the stock sits between 50 and 55 the max gain is achieved (max loss is UNLIMITED with this trade - very risky). But this is a graph at expo. The trade is short vega; specifically: -0.074 (calls) and -0.079 (puts) = $0.15 for every vol point x 5000 x 100 = $76,500 for every point vol moves down (or negative that number if vol moves up). Note that vega is not constant, so linealy multiplying that number by 31 does not lead to the max payoff (it is some number greater than the max payoff which is not possible).

The Charts Tab snapshot is below (click it to enlarge). You can see clearly that the IV60™ (orange line) is trading well above the HV30™ (blue line). Further, the trades sold ~31 vol. The yellow area below the chart shows the difference between the two. This feature is coming soon to LIVEVOL Pro.



The historical vol is ~ 16% or 15 vol points lower than the trade. The payoff can get a little tricky pre Feb. expo as there is also time decay (theta). Clearly this trade is short theta - so it makes money if all else stays the same and time moves forward.

If vol where to drop to the historical level (30 day historical level) without a stock move, the payoff would be sizeable and the position could be closed pre-expo. Selling strangles is almost certainly not retail - and a short strangle trade this large is definitely (almost) not retail. So it seems that institutional money is taking a vol bet (down) on LIFE.

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Chattem (CHTT) - Identifying Order in Flow in a Takeover

SNY made a $93.50 cash bid for CHTT common stock. CHTT closed $69.98 on Friday, so the takeover price is a $23.52 or 33.6% premium. You can see the LIVEVOL™ Pro Summary below along with the corporate action. You can click the images to enlarge them.





There wasn't any obvious order flow on Friday in the calls, but a closer look uncovers at the very least a coincidence if not a hint of the possible deal.

Below you can see the open interest (OI) chart for the Jan 70, 75 and 80 calls (the highest strikes available at the time). Note that within two weeks the OI for all lines began to increase from 0 to 567, 1232 and 2092 respectively. Click the images to enlarge.







Using average prices (or estimates of average prices) for the options I see this profit from those trades by line (buying on offer, selling on bid):

70: Buy 567 for $1.45 <---> Sell now @ $22.80 <---> $1.2 million
75: Buy 1232 for $0.30 <---> Sell now @ $17.80 <---> $2.2 million
80: Buy 2092 for $0.15 <---> Sell now @ $12.80 <---> $2.6 million

For a total $6 million gain on $151,000 or 3900% in 13 days.

This type of order flow is much more common than the uber obvious 5,000 call purchases on the offer with ten minutes to go in the trading day. But, note that the dollar amount won is just as big.

Understanding order flow can be an exercise in memory and trend identification. At other times it's identifying the obvious. The accumulation of a position can be just as telling (if not more so) as the one time big bet.

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