THC - Risk Reversal Trades 10,000x... Again

Discussion in 'Options' started by livevol_ophir, May 5, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    THC is trading 5.86 with IV30&#8482 up 5.7%. The stock has risen off a 52 wk. low of $2.13 up to as high as $6.46.

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    The company has traded over 20,000 options in the first hour on total daily average option volume of just 5,042. One 10,000 x 10,000 spread in Nov is the action. The Stats Tab and Day's biggest trades snapshots are included (<a href="">in the article</a>).

    The Options Tab (<a href="">in the article</a>) illustrates that the spread in Nov is opening for both the calls and the puts (volume is huge relative to very small open interest).

    The trade was 10,000x:
    Buy Nov 6 calls for $0.82
    Sell Nov 5 puts @ 0.47

    This is known as a risk reversal (or "risky"). The cost is $0.35 x 100 x 10,000 or $350,000. It breaks even at $6.35. The position moves $1,000,000 per $1 in stock above $6 and below $5. Note that the company likely has earnings in the Aug cycle but the position was taken in Nov options. This may be one to write down and keep an eye on to see if the trade closes, doubles down or neither as we approach Nov.

    A similar trade was made at the end of March. The largest trades from that are included (<a href="">in the article</a>).

    In this case, it looks like the trade was 10,000x:
    Buy Jan 2011 7.5 calls for $0.65
    Sell Jan 2011 5 puts @ $0.55
    and then...
    Sell Jan 2011 10 calls @$0.10

    The final call sale makes the trade premium neutral (i.e. net cost is zero other than commissions). This is essentially the same bet but requires the stock to climb over $7.50 to be profitable. Again, it draws a line in the sand that the stock will not go below $5. Also, it looks forwrd quite a bit, as these are Jan 2011 options. The bets together are bullish for the stock near the end of the year - and together are short 2,000,000 deltas below $5.

    Finally, the Charts Tab (12 months) is below (<a href="">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30&#8482 - red vs HV20&#8482 - blue). The yellow shaded area at the very bottom is the IV30&#8482 vs. the HV20&#8482 vol difference.

    We can see the stock was as low as $2.13 over the last year - so it's moved significantly now and was just under $6.50 at its peak.

    This is trade analysis, not a recommendation.

    Details, prices, trades, vols here: