For options information, Seeking Alpha ranks as one of my top destinations. Several authors provide daily columns that educate and help keep readers up to date. I often use the trades mentioned in these articles to help inform the use of options by relatively conservative, long-term investors like me.
Shares in the provider of coin-counting and Redbox self-service kiosks are bucking the trend today ... Options on the kiosk provider are far more active than usual ... Trading patterns are mixed, but there are some strategists positioning for the rally to continue next week. Out-of-the-money calls in the front month attracted bullish bets, with more than 2,060 contracts changing hands at the April $70 strike against 1,720 open positions. The $72.5 strike calls expiring next week traded more than 540 times, with much of the volume initiated by buyers shelling out an average premium of $0.44 apiece this morning. Traders long the $72.5 strike calls profit at expiration in the event that shares jump 10.5% to surpass the average breakeven price of $72.94. Barring that move, call buyers lose the full amount of premium paid if the options are out-of-the-money at April expiration.
One of the things I plan on writing about in Tuesday's issue of my Options Investing Newsletter deals with the last sentence in that excerpt from IB's summary. Investors who are new to options often have difficulty wrapping their heads around the distinction between exercising an option and trading the premium. Sometimes, authors, present company included, do not distinguish between the two well enough.
Call buyers do not necessarily lose their entire premium if the options they own today are OTM at expiration. It might seem simplistic or nit-picky to point this out, but it would be easy to take the following (incorrect) meaning out of that sentence: If I own a call, I stand to lose my entire premium OR exercise the contract to buy the underlying stock at expiration. That's not the case.
You have to hold that call all the way until expiration for it to expire worthless. Additionally, a mix of out-of-the-moneyness and not enough time to expiration can render a call effectively worthless prior to expiration because you simply cannot find a buyer even willing to pay a penny for your call. And, even if you could, transaction charges would likely make the trade a silly one to execute.
There's little doubt in mind, however, that the traders who bought CSTR calls will flip them sooner rather than later on anticipation of profits tied to further momentum. In the newsletter, I will get deeper into the difference between trading options premiums and exercising contracts.
As far as buying calls on CSTR goes, I would not do it at this stage of the game. If anything, I expect the stock pull back further from its highs than it did today next week before it resumes this run, if even it does at all.
If you check CSTR's history, you'll see that the company has been less than stellar with providing accurate forecasts to both the up and downsides. In some respects, Coinstar makes Netflix (NFLX) look as if it has a handle on its business. Speaking of Netflix ...
I am not ready to jump on the bandwagon that the solid forthcoming results from Coinstar mean much to Netflix. Of course, in some respect they do. It's stuff we all know - Netflix lost business and Coinstar picked some up. The DVD is not nearly as dead as Reed Hastings thinks. It pays to actually carry new movies as opposed to films and television shows people have already seen 800 times. And the list goes on.
Don't let the Coinstar news lull you into a false sense of certainty that Netflix will report horrible earnings on April 23. Nothing would surprise me. Not even an earnings beat. But, none of this really matters - not Coinstar, not the next report, not Qwikster or Split 2.0 or the price increase - Netflix lives and barely breathes on borrowed time.
Earlier in the week, Seeking Alpha contributor optionMONSTER noted that at least one trader expects Sirius XM (SIRI) to trade range-bound for some time. To follow that sentiment he or she put on the following trade that optionMONSTER believes was tied to a large purchase of SIRI stock:
A trader sold 25,000 January 2014 2.50 calls for the bid price of $0.43 on a wide bid/ask spread, according to optionMONSTER's systems. The previous open interest was 15,093 contracts, so this is a new opening position.
I figured it would make sense to review options volume and open interest on the call side on SIRI from Friday. It was a slow Friday, however, you can see the large trades (there were similar ones on different contracts not mentioned here) reflected in the open interest.
For example, the January 2014 $2.50 calls only traded 173 contracts on Friday versus open interest of 65,418. Interestingly, 20,017 January 2014 $3.00 calls did change hands on Friday, against open interest of just 21,275. Thanks to Frederic Ruffy for providing some color, via email, on the activity in the $3.00 calls:
I know that 10,000 of the Jan14 $3 calls were sold and tied to a block of 400K shares. It's in line with the delta of those calls, which is .4. Long 400K shares and short 10,000 calls with a -.4 delta is delta neutral.
There was another 10,000 for 25 cents per contract and looks similar.
Of course, we'll need to verify that these were not closing trades by checking open interest Monday morning, but chances are they were not.
I want to quickly illustrate what a fool's game weekly calls can be. Unless you're writing covered calls or are really careful when selecting strike prices on cash-secured short puts, I would stay away from them, particularly on volatile stocks.
Apple (AAPL) plunged on Friday. If you had some on-paper profits on long weekly calls, you might have planned on waking up Friday morning, hopping in front of the computer shortly after 9:30 a.m., unloading them for wild profits and spending the rest of the day at the shore. Or, maybe not.
Consider the range on the still ITM AAPL $600 weekly call. It traded as high as $24.24 and as low as $4.75. The ATM AAPL $605 weekly call sported a high of $19.55 and a low of a dime. Believe me, you were not getting out on top this morning with some mortal spirit answering a hope and a prayer.
Disclosure: I am short NFLX.
Additional disclosure: I am short NFLX via a position in June $40 put options.