someone bought 100,000 of the USO jan2010 55 calls. anybody have any opinion of this? with contango looks like oil would have to go to around 90 for these calls to make money. what do u guys think?
If it wasnt a directional trade then the only thing it could be is a volatility trade hedged on about a 7 delta. For what could he be hedging against? definately not a hedge against any short physical oil or futures position because that wouldnt make sense to buy USO options. The only thing he could hedge against is a short USO stock position. but the jan 55 calls are a 7 delta and hardly any gamma back month and 20 strikes otm. that would be a terrible way to hedge 700,000 shares short you get smoked all the way up to 55 over a medium period of time. if he wanted to short the stock he would have bought like the sep 40 calls. i dont know its a skew trade because 100,000 lot is not particularly liquid and its not part of a spread. given contango this guy thinks oil is going 90-100$ which puts USO roughly in the 55-65$ range. last time I saw size in USO this big 85,000 85-80 put spreads were bought back month when USO was around 120 and OIL was around 130-140. then USO went to 40 with at least a month left in this guys put spread. if its the same guy he knows exactly where the stock is going.
No one knows all the possible reasons why such a trade was made. In this case - whatever the reason for it - it looks like a pre-arranged trade to me. If you look at the action in that strike over a week or two prior to that trade and for a few days after, you will see that that 100,000 lot didn't really affect IV at that strike. Apparently the seller was just as ready and willing to sell 100,000 calls as the buyer was to buy them. That's why it looks to me like a pre-arranged trade. You seem to imagine this is driven by someone who has a definite opinion and suddenly came in one day with a 100,000 lot buy order. Not likely. As you yourself say, these options are pretty illiquid. An order like that represents many times the daily volume of ALL the USO options in that month, and would move IV significantly. I have no idea why this trade was made, but as I said I suspect it was pre-arranged. Maybe two firms agreed to do it for accounting reasons. Who knows? But the notion that this was a directional trade by some big shooter making a size bet does not fit the IV reaction - or lack thereof.