Wednesday, December 22, 2010

Office Depot (ODP) - Calls Trade Again, OI Grows, Vol Erupts

ODP is trading $5.15, up 6.4% with IV30™ up 45.4%. The LIVEVOL™ Pro Summary is below.

This is the second post today dealing with heavy call action and exploding vol. You can read the prior post here:
Janus Capital (JNS) - Calls Trade, Vol Explodes

ODP has traded 13,834 contracts in the first 2.5 hours on total daily average option volume of just 2,207. Calls have traded more than 13,300x, yielding a 28.9:1 call:put ratio. The action is in the Jan 5.5, 6 and Feb 5 and 6 calls. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the Feb calls and puts are opening (compare OI to trade size). The Jan calls are ambiguous. Note also the enormous OI in the Jan 5 calls.

As I see it, the order flow is this:
Jan 5 calls: Long OI
Jan 5.5 calls: Purchases Today
Jan 6 calls: Sales Today
Feb 5 calls: Purchases Today
Feb 6 calls: Purchases Today

So basically, a ton of long OTM calls in Jan and Feb are either long or purchased today with the exception of the Jan 6's.

Here's an interesting note from The Motley Fool:
The office is closed
Forget the disgrace of being kicked out of the S&P 500 -- office supplies retailer Office Depot (NYSE: ODP) is likely to be kicked to the curb permanently. Both it and rival OfficeMax had been subject to possible buyout rumors, as the economy has wreaked havoc with business purchases of paper clips, rubber bands, and correction fluid.

To get to a surprise $0.04-per-share profit last quarter, Office Depot had to slash overhead. That's a fine short-term remedy, but pressure from its biggest competitor, Staples (Nasdaq: SPLS), means it's going to need additional ways to hold the line on costs. That's not an easy, repeatable solution, particularly after its CEO resigned following violations of Regulation FD rules. Office Depot is a stock that will be left at the station.
Source: The Motely Fool

So either a buyout or a collapse basically. Hmmm...

The Skew Tab snap (below) illustrates the vols by strike by month.

There's a decidedly upside skew in ODP front month calls, less so, but still some in Feb.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock has been a lot lower, but not much higher in the last 6 months. The IV30™ explosion is on the bottom - pretty impressive.

Possible Trades to Analyze
1. Pure Spec on a Buyout:
Buy a Jan 5.5 or 6 call and hope for a buyout.

2. Skew Trading Intra-Month:
Buy the Jan 5.5/6 call spread for $0.15. Try to win more than 2:1 on a buyout but bet small. This purchases ~65 vol and sells ~ 68 vol.

3. Skew Trading on the Calendar:
The Feb 6 calls have traded 4,000+x for $0.15. Try this:
Buy the Jan/Feb 6 call spread and pay $0.10 (or even $0.05). Obviously if the takeover happens in Jan, that would be "bad." But if not, woo, a little $0.05 call in a takeover name sounds fun. Granted odds are small.

This is trade analysis, not a recommendation.

Follow Live Trades and Order Flow on Twitter: @Livevol_Pro

Legal Stuff:


  1. Regarding #3 above - Can you explain what happens to the Feb 6 options if takeover is in Jan @ say $8. How would this be bad - regardless of takeover date if I still own the Feb right to buy stk @ 6 wont this offer me protection for the Jan 6 call? I would only loose max the $0.10 investment right?

  2. That's right. You will lose the entire bet if the takeover is in Jan, but certainly no more than 100% (i.e. $0.10).