Tuesday, January 5, 2010

Dynegy (DYN) - Call Buyer/ Put Spreader

DYN is a $1.5B provider of energy products and services in North America. The LIVEVOL™ Pro Summary is below.

The company averages 1,466 option contracts traded a day - in the first three hours over 10,200 have traded. The Company Tab snapshot below (click to enlarge) demonstrates that exactly 8000 puts have traded and the rest are calls.

The day's largest trades snapshot below (click to enlarge) illustrates that the 8000 puts traded in a 4000 Jan/Feb 2.5 Put Spreads (buying Feb and selling Jan for 0.10 debit). The other biggest trade is a purchase of the Feb 2.5 calls.

The Options Tab snapshot below (click to enlarge) demonstrates that the Feb options are opening (small open interest relative to trade size).

So what's the trade? The put spread could be a roll - Selling Jan puts he already owned and then buying the Feb puts to roll protection into the next month. If that's the case this trade is really just a 1:2 ratio straddle. i.e. Buy 1 call and 2 puts on the Feb 2.5 line. That's a bet the stock goes down, but with a smaller bet that it could rip through $2.50 on the upside. Either way, that trade loses most if the stock goes to $2.50 and sits.

If the put spread is not a roll - i.e. no previous option position existed and this is all opening, then the Jan options will be exercised (probably) and this guy will be long stock. He buys 4000 puts in Feb to hedge the long 400,000 stock and buys 2000 calls for an upside bet. That would be bullish.

Finally, this could be any combo of the above but selling stock with the calls (to make them puts) or buying stock with puts (to make them calls - this is unlikely since a spread traded).

All of these trades bet on a move in the stock.

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