A quick look at options actions for week ended 15 Jul 2011
1. NCM.ASX (last $40.27)
Gold has been a stalwart in the last 3 weeks. Whilst the S&P/ASX 200 has basically done a boomerang in the last three weeks (started and finished around the 4470 level), NCM has climbed 10.4%; outperforming not just the Australian market but also the US dollar Spot Gold price by 4.5% (which closed at USD1592.99 on Friday). After such a strong 3 week performance and NCM at early $40, what are options traders’ thinking?
Firstly, volume in NCM options have increased in the last two weeks and domination has switched from puts to calls in the last 2 weeks. Especially on Friday last week, some large quantities of bear strategies have been observed.
On the put side, large quantities of buying were seen going through the Jul $3950 put which appears to be part of a bear put spread strategy which was accompanied by the selling of the Jul $3800 put.
Whilst on the call side, large quantities of the Jul $4100 calls were traded, which were accompanied by some bear call spread strategy as well. The July and September calls were popular.
In summary, having risen 10% in just 3 weeks and sitting above $40 last week and with higher implied volatility on the stock, some bear spread strategies which involve the selling of options to capture the higher premiums have set in. These strategies may be a precursor to the stock turning down.
2. BHP (last $42.89)
Following BHP’s announcement of its acquisition of US’ shale gas operator Petrohawk for US $15.1b on Friday, BHP‘s share price has reacted with a fall of 71c of 1.63% on its share price, whilst its peer RIO rose 0.5% instead. The view is mixed. Based on RBS Morgans' preliminary modelling of the assets, the deal is 1% EPS accretive in the first year, and 1% NPV dilutive. The key risk is oversupply in the US market, which may suppress prices for an extended period. Long term though, if export capacity can be opened up, this may lead to a greater level of pricing tension (some way off). While the deal helps BHP gets a foot in to the US gas market but the acquisition reduces the chance of a buyback being announced in its August results as well, which was a catalyst for the stock.
How did options traders react to the deal?
Options volume on Friday, doubled that of last Thursday and Wednesday but there has been no change to the trend of the stock though. Trading is more active on the put side. The put/call ratio for BHP sits more on the bearish side with an average of 1.3 times for the week.
The larger trades seem to be a combinations of bearish strategies.
On the call side, selling of Jul $4450 call was popular and some were accompanied by buying of lower call strikes as a bearish strategy.
Puts were active and the larger trades were the selling of Jul and Aug $4300 puts which were combined with higher strike puts like $4400 to create bear put spreads.
Overall, the balance seems to be on the bearish side on BHP.
3. RIO.ASX (Last $81.36)
Despite the more positive trading session on Friday versus BHP, from options perspective, the actions are quite similar. Put/call ratio is negative on RIO with an average of about 1.4 on a weekly basis in fact, Friday’s put/call ratio was at 1.78, worse than the weekly average.
Some of the trades observed were the selling of Jul $7200 and $7900 puts which were combined by buying of higher strike puts like the $8000 or $8200.
At the call end, selling of Jul and August $8200 calls were observed.
As Friday's move up was not accompanied by higher volumes, the weak trend experienced in BHP and RIO, may continue until turn arounds are signalled.
