During the week, I look for unusual options activity, and at the end of the week, I highlight the most compelling options activity that occurred. I will be looking at potential catalysts that could drive the stocks I cover upward or downward towards the strike prices that the unusual options activity occurred. The way I determine the most compelling ideas is by using the ThinkorSwim platform to scan the market for ideas that have the most potential upside/downside.
Unusual Call Activity #1: Groupon (NASDAQ:GRPN)
Description: Groupon is an online commerce company, which offers consumers discount coupons for goods and services worldwide.
Option Activity: On Tuesday, January 26th, there was a purchase of 5,000 $3 February call options for $0.19/contract. At closing that day, the stock was priced at $2.78, which means, if the stock reaches the strike price, the common stock has a potential upside of 7.91%. If the option buyer holds the options all the way to expiration, the price needed to break-even, excluding the cost of commissions would be $3.19.
Action Since Trade: Since this trade was initiated, the share price has fallen from $2.78 to $2.69 at the time of writing this and with that drop, the potential common stock upside has increased from 7.91% to 11.52%, if the stock were to reach the $3 strike price by expiration.
Catalyst: With this purchase of $3 calls expiring in less than a month, this is clearly a targeted bet on Groupon earnings. Groupon reports earnings on February 11th after the market closes and with expectations that Groupon will post flat earnings, the stock is potentially set up for a move upwards given the history of earnings beats Groupon has had. As you can see in the chart below from Estimize, Groupon has beat Wall Street estimates in three out of the last four quarters. In addition, there is some seasonality with this earnings report as well, because during the fourth quarter over the past two years that is when Groupon has posted its highest revenues.
[Chart from Groupon Estimize page]
Unusual Call Activity #2: Synergy Pharmaceuticals, Inc. (NASDAQ:SGYP)
Description: Synergy Pharmaceuticals is a small-cap biopharmaceutical company focused on the development and commercialization of gastrointestinal therapies.
Option Activity: On Monday, January 25th, there was a purchase of a January 2017 ratio call spread. The buyer purchased 5,000 January 2017 $5 call options for $1.19/contract and sold 10,000 January 2017 $10 calls for $0.37/ contract. At closing that day, the stock was priced at $3.98, which means, if the stock reaches the strike price purchased, the common stock has a potential upside of 25.63%. If the option buyer holds the options all the way to expiration, the price needed to break-even, excluding the cost of commissions would be $5.45.
Action Since Trade: Since this trade was initiated, the share price has fallen from $3.98 to $3.58 at the time of writing this and with that drop, the potential common stock upside has increased from 25.63% to 39.66% if the stock were to reach the $5 strike price by expiration.
Catalyst: Synergy notes on their website they will be applying for approval of its product for chronic idiopathic constipation in January of this year and with potential approval expected by the end of 2016. Currently, Synergy has no revenues, so being able to have a product that was effective and safe, well tolerated and provided statistically significant results shows the promise for its product. In addition, Synergy also has a Phase III program for irritable bowel syndrome, which positive data for those trials could push the stock higher as well.
Unusual Put Activity #1: Enbridge, Inc. (NYSE:ENB)
Description: Enbridge operates transportation, distribution and storage of natural gas in Canada and the United States. On the front page of their website, Enbridge states, "We transport 53% of U.S.-bound Canadian production, a figure that accounts for 15% of total U.S. crude oil imports." That shows the significant scale that the company has.
Option Activity: On Monday, January 25th, there was a buy/write options trade in ENB, where someone bought the common stock and simultaneously sold 5,500 $27.50 July put options for $1.70/contract. At closing that day, the stock was priced at $31.55, which means that if ENB reaches the $27.50 level, they would be obligated to buy the stock at that level, which is 12.84% below the stock price that day. This strategy shows that this put seller is comfortable with purchasing a large block of stock at the $27.50 level, which coincidently is almost exactly the intraday low that was reached last week. If the option seller holds the options all the way to expiration, the price needed to break-even, excluding the cost of commissions would be $29.85.
Action Since Trade: Since this trade was initiated, the share price has risen from $31.55 to $33.05 at the time of writing this. With that increase, the discount to the current price that the put seller has agreed to purchase the stock at is now 16.79%.
Catalyst: The focus for energy companies has been about capital expenditures and dividend stability. At the beginning of December, Enbridge increased its dividend 14%, which shows the strength of its business given the current environment we are in. Given this, it is easy to see why someone was comfortable with purchasing the stock if it continued to fall to the $27.50 level. In addition, another catalyst later this year will be if the Canadian government reverses course and allows Enbridge to build its pipeline that would serve markets in Asia. In November, it was announced that there would be a ban on oil tankers on the northern coast of British Columbia, which is where the proposed pipeline Enbridge wants to construct would be headed. Any reversal of this policy would be beneficial to Enbridge stock.
Unusual Put Activity #2: Humana Inc. (NYSE:HUM)
Description: Humana is one of the largest health insurers in the United States.
Option Activity: On Thursday, January 28th, there was a purchase of a January 2017 $130-$160 put spread. The buyer purchased 4,000 $160 put options for $21.00/contract and sold 4,000 $130 put options for $8.60/contract. If the option buyer holds the options all the way to expiration, the price needed to break-even, excluding the cost of commissions would be $147.60. This put seller is betting that the stock price will be somewhere between its current level and $130/share by January 2017.
Catalyst: Because the options are in January 2017, there are a number of earnings catalysts that will occur over the next year, with the soonest earnings release being on February 10th. The biggest catalyst however, is the potential acquisition of Humana by Aetna (NYSE:AET). With the current cash consideration of the deal plus the shares of Aetna holders of Humana would receive, the deal is currently valued at over $207/share. With the stock already trading at a significant discount to this price and this bearish bet, this is a signal that its deal with Aetna could be in jeopardy. If that were the case and the deal were to fall apart, the stock would have some added downside risk, which would be beneficial to this put spread buyer as long as the price stays above $130/share.
Disclaimer: See here.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.