Unusual Option Activity Briefing: Opposing Bets On Commodities Giants

| About: Rio Tinto (RIO)

Summary

This week there were two opposing trades in commodity giants Rio Tinto and BHP Billiton.

A well timed options trade was made in Oasis Petroleum earlier this week.

A bearish trade was made on a large but under-covered company Synopsys.

Unusual Option Activity Briefing: Opposing bets on commodities giants

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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.

Unusual Call Activity #1: Rio Tinto plc (NYSE:RIO)

Description: Rio Tinto is involved in the exploration, producing and processing a number of natural resources including base metals, precious metals, rare metals and diamonds.

Option Activity: On Thursday February 4th, there was a purchase of 4,128 $30 March call options for $0.85/contract. At closing that day, the stock was priced at $26.96, which means, if the stock reaches the strike price, the common stock has a potential upside of 11.28%. If the option buyer holds the options all the way to expiration, the price needed to breakeven, excluding the cost of commissions would be $30.85.

Catalyst: RIO will report its full year 2015 results on February 11th, which is the most important catalyst for RIO in the period leading up to the expiration of options purchased. Earlier this week, S&P cut is rating on fellow mining giant BHP Billiton (NYSE:BHP) and in the news story, it was noted that RIO could be next in line for a downgrade. I believe RIO is in a superior position to BHP because of its lack of exposure to oil in comparison to BHP. The data in the following table shows that y/y for data up to the June 2015 half-year results, that RIO has had revenues that have declined less. Just as an example, RIO gave a 4th quarter production update and nowhere in that report, was "crude oil" or "oil" mentioned.

Revenues

Jun-14

Dec-14

Jun-15

% Decline

RIO

24,337

23,327

17,980

-26.12%

BHP

33,258

24,860

19,776

-40.54%

Click to enlarge

[Table Data from Gurufocus]

Unusual Call Activity #2: Oasis Petroleum (NYSE:OAS)

Description: Oasis Petroleum develops oil and gas resources in the Bakken oil field and is one of the largest players in that field.

Option Activity: On Tuesday February 2nd, there was a purchase of 6,000 $6 March call options for $0.60/contract. At closing that day, the stock was priced at $5.10, which means, if the stock reaches the strike price, the common stock has a potential upside of 17.65%. If the option buyer holds the options all the way to expiration, the price needed to breakeven, excluding the cost of commissions would be $6.60.

Action Since Trade: Since this trade was initiated, the share price has increased from $5.10 to $6.02 at the time of writing this and with that increase, the potential common stock upside has been realized. Currently, the March $6 call options are trading for $0.95/contract, which means the buyer who purchased these options for $0.60/contract is already sitting on a nice profit.

Catalyst: This is an interesting case since OAS still has two weeks until they report earnings on February 24th and the options purchase are already slightly in the money and the buyer is sitting on a profitable position. It will be interesting to watch OAS over the coming weeks to see if there is another large trade, where this buyer would sell out prior to earnings because of the fast run-up in the stock or hold until after earnings are reported. The earnings that will be reported will most likely be very bad, but the bottom in OAS could potentially be in. A clue that the bottom may be in is that the common stock and OAS bond prices have slightly diverged from crude oil. OAS bonds that mature in 2019 bottomed the day before crude oil bottomed and since then have steadily rose along with the common stock. OAS common stock closed at its highest level since the bottom on the 20th of January when bond prices and the common stock bottomed, where as crude oil topped out on January 29th and has since fallen.

[Chart from FINRA OAS bond page]

Unusual Put Activity #1: BHP Billiton Limited

Description: BHP is one of the largest natural resource producers in the world with its hands in everything including base metals, precious metals and oil & gas.

Option Activity: On Thursday February 4th, there was a purchase of 6,250 May $21 puts at a price of $1.90/contract. At closing that day, the stock was priced at $22.89, which means, if the stock reaches the strike price, the common stock has a potential downside of 8.26%. If the option buyer holds the options all the way to expiration, the price needed to breakeven, excluding the cost of commissions would be $19.10.

Catalyst: BHP will report its half-year results on February 23rd, which will most likely be bad; however, the most important item during that earnings report is whether BHP will cut its dividend. There have rumors that BHP will cut its dividend at this upcoming earnings report and if that were to occur, even though it might be expected, the stock could still push downward. In addition, given that BHP increased 7% today, any pullback in oil from this short-term bounce will most likely send shares of BHP back lower.

Unusual Put Activity #2: Synopsys, Inc. (NASDAQ:SNPS)

Description: Synopsis focuses on electronic design automation products, which are used to design chips, as well as holding a suite of semiconductor intellectual property.

Option Activity: On Thursday February 4th, there was a purchase of 3,000 March $40 puts at a price of $0.65/contract. At closing that day, the stock was priced at $42.86, which means, if the stock reaches the strike price, the common stock has a potential downside of 6.67%. If the option buyer holds the options all the way to expiration, the price needed to breakeven, excluding the cost of commissions would be $39.35.

Catalyst: Synopsys will report earnings on February 17th and it is expected that the quarter will be a rough one, given that at the beginning of December SNPS guided results fiscal first quarter significantly below consensus. Another reason why Synopsys earnings could disappoint is many of its customers have reported slowing earnings. As the chart below from a December 2015 investor presentation shows, Synopsys has some high profile customers. For example Samsung (OTC:SSNLF) reported slowing earnings, Qualcomm (NASDAQ:QCOM) reported FQ1 chip division (QCT) revenue -22% Y/Y, both of which, potentially does not paint a good picture for Synopsys.

[Synopsys Investor Presentation]

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.