Welcome to the inaugural issue of my Unusual Option Activity Briefing.
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. In addition, 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 my ThinkorSwim platform to scan the market and to see which ideas have the most potential upside/downside. For example, if stock "XYZ" is trading at $25 and has a large call buy at the $26 strike, and then say stock "ABC" is also trading at $25 and has a large call buy at the $29 strike, I will cover "ABC" because of the higher potential upside.
Unusual Call Activity #1: Host Hotels & Resorts (NYSE:HST)
On Tuesday January 12th, there was a purchase of 10,000 April $16 calls. At closing that day, the stock was priced at $14.33, which implied a potential upside of 11.65%.
Action Since Trade: Since this trade was initiated, the share price has fallen from $14.33 to $13.10 at the time of writing this and with that drop, the potential upside has increased from 11.65% to 22.14% if the stock were to reach the $16 strike price by expiration.
Catalyst: HST reports earnings on February 17th and that is a potential catalyst that could send shares of HST to the $16 strike price of the options that were purchased. This seems to be a quality idea because as the table below shows, HST has beat earnings in each of the last four quarters.
[Image from HST Zacks page]
Unusual Call Activity #2: iStar (NYSE:STAR)
On Tuesday January 14th, there was a purchase of 2,450 July $12 calls. At closing that day, the stock was priced at $10.66, which implied a potential upside of 12.57%.
Action Since Trade: Since this trade was initiated, the share price has fallen from $10.66 to $10.24 at the time of writing this. With that drop, the potential upside has increased from 12.57% to 17.19% if the stock were to reach the $12 strike price by expiration.
Catalyst: With this call buyer purchasing calls in July, they are getting two potential catalysts the first of which is when STAR reports earnings on February 18th and the second is when the company reports its 1st quarter earnings this spring as well. While HST has seen small consistent earnings beats, STAR has a wide range of earnings quarter to quarter as the table below shows. As the table below shows, when STAR does beat earnings, they do so by a wide margin.
[Image from STAR Zacks page]
Unusual Put Activity #1: Newfield Exploration (NYSE:NFX)
On Tuesday January 12th, there was a purchase of 7,831 March $25 puts. At closing that day, the stock was priced at $29.31, which implied a potential downside of 14.70%.
Action Since Trade: Since this trade was initiated, the share price has fallen from $29.31 to $26.00 at the time of writing this. With that drop, the potential downside has decreased from 14.70% to 3.85% because the stock has fallen nearly 7% in today's massive sell-off.
Catalyst: This put buyer is getting one catalyst in the form of an earnings report on February 23rd as well as the continued long-term catalyst of oil market weakness. As the chart below shows, Newfield posted positive earnings in the fourth quarter of 2014, but since then, its earnings have been significantly negative. I expect with the continued drop in oil that when NFX reports earnings on February 23rd, they will once again post another quarter of record losses.
[Chart Data from Gurufocus]
Unusual Put Activity #2: Exelon (NYSE:EXC)
On Wednesday January 13th, there was a purchase of 12,400 April $25 puts. At closing that day, the stock was priced at $27.54, which implied a potential downside of 9.22%.
Action Since Trade: Since this trade was initiated, the share price has fallen from $27.54 to $27.25 at the time of writing this. With that drop, the potential downside has decreased from 9.22% to 8.26% if the stock were to reach the $25 strike price by expiration.
Catalyst: Since EXC is a utility, they don't usually have big jumps for earnings, so I looked at what potential catalysts there were that could occur by April and found that there is the possibility that their proposed merger with Pepco (NYSE:POM) could be thwarted. Just a couple weeks ago, there was a news story about how the GSA urged regulatory agencies to reject the deal. If this deal were to fall through, I would expect that EXC shares would decline.
As this is the inaugural issue, I would love to hear reader's thoughts on this new series. I hope the comments section can be a place to discuss unusual options activity that fellow readers see in the market.
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.