Major Option Trading Activity on These Stocks

Major activity on an option usually means the trading community expects the stock to move one way or the other. Here are the three most active stocks from yesterday. Before you jump on board with any of them, make sure you do your own due diligence. Check them out for yourself.

Semiconductor outfit Applied Materials (AMAT), bauble giant Tiffany (TIF) and mining behemoth Freeport McMoran (FCX) took up the SP-500’s top three spots for unusual option activity Tuesday for very, varied reasons and very different trading agendas.

In the top spot, Applied Materials saw a massive opening print of 72,500 contracts in the slightly out-of-the money July 12 calls for $0.78 per contract. The action represented a bit more than 80% of the day’s heavy volume compared to its daily total average of about 7,500 contracts and single-handedly pushed the put/call ratio to a very lopsided .08.

Lest you think this trader had to be a bull in lieu of the broader market’s technical gainer, think again. According to the freedom of information act or well, umm the free stuff on Yahoo Finance, the print was put up by an interested and initiating seller. Shares have gained about 8% in the past three sessions and now lay somewhat enthusiastically above their upper Bollinger Band, so it’s likely this assumed seller could be hedging an existing bullish bet in shares or other options.

On the other hand, with no prints or confirmation of a larger position; an overtly bearish naked sale of the call can’t be ruled out altogether. Technically, the expiration breakeven pricing of 12.78 does line up just above key resistance from the slightly lower 200SMA while matching the November highs. But, with more than half a calendar year until expiration and that level pretty much equal to what’s been secured in the course of three days, our view is the sale is one that’s tied to a more cautiously bullish foothold.

In the number two spot, shares of Tiffany (TIF) tumbled about 10.50% after it warned and lowered its FY12 outlook slightly below analyst views due to “restrained spending by consumers of fine jewelry.” On the option side, a final tally of 64,000 was spied with puts maintaining a modest but maybe not too surprising lead over calls throughout the session before ending with a put/call of 1.22. More interesting was the fact order flow in the puts, led by a fairly wide margin in the at-the-money May 60 contract; appears to have had the interest of shoppers of TIF shares.

Lower to flat implieds, despite the company’s warning and a rather weak-looking weekly price chart to our technically-dialed in eyes, suggests various size bulls, in a flood of prints totaling 6,700 contracts compared to open interest of 2,300, may have been using the targeted sale or short put strategy to pick up shares at a discount of about 8% beyond Tuesday’s drubbing in shares.

Finally and in the third spot and winning the bronze or umm, copper medal amongst readers interested in what the other guy or gal is doing; miner Freeport McMoran (FCX) saw traders digging deep into its calls today and in more than one way. Trading in its contracts totaled roughly 825% more than normal on massive volume in excess of 550,000 with calls favored by more than 13-to-1.

Unlike with Applied Materials, Tuesday’s action has the appearance of Fool’s Gold for most all of today’s speculators. The reason we say this is tomorrow is Freeport’s ex-date on its quarterly $0.25 dividend payout. As much and easily confirmed by a quick visual inspection, traders were overwhelmingly attempting to game the payday with what’s known as the dividend play.

The strategy always involves a very good dose of Lady Luck and an enviable commission schedule as traders are swapping out deep call verticals or buy-writes in the hopes of being left unassigned on a call with large open short interest as those positions go through a lottery process overseen by the O.C.C in determining who’s left holding what.

If all the stars align, a trader playing the game will wake up with an above market price synthetic short put or buy-write position. Given a cursory look at the board and where today’s activity lay compared to open interest and how the matching put values looked in relation to the dividend payout; and one thing is certain, it’s obvious investors risk appetites are back in 2012.

See Optionetics for the rest of the story

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