Using Friday's Options Activity To Get Ready For Monday's Market

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Includes: AMZN, BCE, TWX, WEN
by: SA Editor Rocco Pendola

Each week, I look at options trades pulled off, presumably, by the big money and relate them to the decisions mere mortal investors must mull.

In a Seeking Alpha column from Friday, Interactive Brokers highlights bullish weekly call activity in Amazon.com (NASDAQ:AMZN):

Options traders expecting the bullish momentum to continue in the near term appear to be accumulating weekly call options. Weekly volume is heaviest at the Mar. '30 $200 strike, where more than 4,300 contracts changed hands against open interest of 1,271 positions. Trading patterns reveal a roughly even mix of buying and selling. Fresh interest in the Mar. $205 strike call, however, is mostly driven by buyers. Traders positioning for shares to post big gains next week purchased the majority of some 3,500 calls in play at the $205 strike at an average premium of $0.72 each. Buyers of these contracts profit at expiration as long as Amazon's shares rally another 5.4% to exceed the average breakeven price of $205.72. Bullish call buying extended up to the $210 weekly calls, as well, with roughly 650 contracts purchased for $0.31 a-pop. Overall options volume of 84,300 lots stands just below the AMZN's 90-day average options volume of 87,480 lots. More than 2.5 calls are changing hands on the stock for each single put in play on the final trading session of the week.

I'm not sure I can point this out enough. The key word throughout that passage - traders. If you believe in Amazon.com, the company, and AMZN, the stock, proceed with extreme caution if you're even considering following the strategy of using weekly options, let alone OTM weeklies, to play that bullishness (or bearishness for that matter).

I love IB's columns, but you need to read them with keen eyes. When they say things like - Traders positioning for shares to post big gains next week purchased the majority of some 3,500 calls in play at the $205 strike at an average premium of $0.72 each. Buyers of these contracts profit at expiration as long as Amazon's shares rally another 5.4% to exceed the average breakeven price of $205.72 - be careful. Read between the lines.

That statement makes it sound as if the "trader" plans on holding those calls until expiration. I've got news for you, they're probably not. A really nimble trader might be in and out of that position in a matter of hours, if not minutes. And they're certainly not hanging on too deep into next week, unless AMZN rocks hard out of the gates early on.

With about 10 minutes to go before the close, the AMZN March 30 $205 call had traded as high as $0.92 and as low as $0.38. At that time, it traded for $0.56, a considerable amount lower than the $0.72 average they were picked up for.

Often, investors tag option trading as gambling. In some cases, particularly this AMZN example, it is. While a place exists for weeklies (i.e., using them to write covered calls), this is not one of them. You have a good chance of getting burnt. If you're bullish AMZN, go long-dated, go ITM or consider the rationale behind this OTM strategy.

In his Friday column, Frederic Ruffy pointed out a little tidbit worth mentioning:

Bullish flow detected in Time Warner (NYSE:TWX), with 4,457 calls trading, or 3x the recent average daily call volume in the name.

I am long the stock and have been looking into the possibility of using options to give myself increased exposure. TWX popped today, closing up 3.69%, or $1.32, to $37.08. That's a big move for this stock. Almost all of the volume in TWX options flows into April calls, primarily ITM contracts. This activity lends support of the strategy I discuss in the article I linked to at the end of the AMZN section.

By the end of trading Friday, 6,854 April TWX calls changed hands with the most popular strike being $35. It's a pretty safe bet that people are buying these calls. There's no news that I know of on TWX and the company does not report earnings until May 2 (confirmed, according to Briefing.com).

Honestly, I am not sure what to make of this move, other than it will be interesting to see if it holds come Monday. And I am happy I am long the stock.

A subscriber to my option investing newsletter sent me the following email today:

I've also been adding to my WEN position. What's your opinion on writing some WEN January 2013 $5 puts? They are paying .55 per contract. In my opinion that's a really nice premium and I don't mind getting assigned at $5. Basically getting paid to buy the stock. Let me know your thoughts. Thank you.

That came after I sent subscribers an update, noting that I purchased 100 more shares of Wendy's (NYSE:WEN) Friday morning for $4.74.

Clearly I like the turnaround story that Wendy's attempts to unfold here. Fellow Seeking Alpha contributor Jack Holland makes a legitimate case for the stock in Wendy's Is A Great Holding For A Market Sell-Off.

As for the subscriber's question, consider part of my reply:

So, at $0.55, you start losing money at $4.45. I like that trade. One downside is that you tie up cash (or margin) for a good eight months. I am not sure I would be willing to do that. I sold a BCE $40 put for May yesterday, which I am more comfortable with from that standpoint.

I would not be shocked to see WEN swing around this $5.00 mark for some time. If they get solid same store sales over the next couple of months it could sustain past five. Definitely one where you need some patience.

So, while, all things being equal, I do like the idea of collecting $0.55 to commit to yourself to buying WEN at $5.00 per share come January 2013, I am not comfortable tying up cash (I rarely use margin) to back the trade. On a low-priced, relatively volatile stock like WEN, I prefer to scale into a stock position. It doesn't take long to build a considerable position. And, if the stock sees strength in the coming months, it might be worth your while to write $6.00 calls against the position. But, make no mistake about it, WEN is a highly speculative play.

I noted in my reply on WEN that I sold a Bell Canada (NYSE:BCE) May $40 put Thursday. That ties up $4,000. That might seem to counter my reluctance to sell a WEN 2013 put. I collected about $0.95 by selling that put, making it so I do not lose money on the trade until BCE flirts just above the $39.00 level. I'm comfortable with that scenario and, frankly, I do not mind tying that cash up in an IRA for just under two months. Ultimately, it might save me from doing something stupid with it. <insert smiley emoticon here> ...

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AMZN over the next 72 hours.

Additional disclosure: I am long BCE, P, WEN.