During last week’s trading ended 24 Feb 2012, we saw NCM hitting a recent high of $36.10 on Thursday. This has been a good run for NCM from $31 since early January 2012. (roughly 16% gain).
The strength in the NCM’s share price last week coincided with a very strong week in call options trading. Trading in calls mirrored the trend of the stock and peaked on Thursday. Total increase in calls traded was significant. There were about 120,000 call contracts traded in the week, much more than the weekly average of about 40,000 contracts. But, on Friday, there was a switch in trading. Calls dropped off in volume heavily whilst puts increased. This signaled long positions being closed and trading on the long side of the stock lessening.
Looking at the other side of the options trade, the puts, especially those on Friday as puts picked up on Friday, were not all protective trades or buying of puts for downward play on the stock. Some of the large transactions on the puts side were attributable to a bullish strategy called bull put spread, with selling of the put at the $34.51 strike. This is coupled by larger quantities of calls for a bull call spread with the selling at the $35.30 call strike.
The options actions in NCM seem to be signaling a cooling off on the long side and a big plunge is not necessarily expected to follow. This is also observed from the stock’s Implied Volatility, which is very flat on both the calls and puts compared to their historicals.
The indicators are giving a hint of a stock that is likely to trade in a small range for a while before deciding which way to go. So, unlikely to try for $36 again in the short term, but more likely to hang around the $34/$35 levels. Selling options is most lucrative for stocks displaying this pattern.
For week ended 10 Feb 2012, FMG low/high was $5.15 – $5.47
FMG had a strong week rising 3.35% last week.
It was also a big week in options for FMG, especially on the calls side. Weekly call volume was 6 times more with puts, with put volume having remained the same. Traders were playing the upside on the share via calls.
Interest seemed to have been centred on a particular strike, the Feb $5.50 calls. There were active buying and selling of the series through out the week. Total contracts traded in the Feb $5.50 calls for the week was 57,000, 26% of total calls traded, especially during Monday and Wednesday last week when FMG peaked for the week at $5.47.
The $5.50 level is now also the largest Open Interest in Feb. With the stock reporting on Wednesday (15th Feb) and analysts expecting a strong result, $5.50 is key. Looking at Implied Volatility for some indications, it seems like calls IV are much higher than puts as well, the Feb ATM 525 calls IV are at 40 vs the puts at 32, showing the popularity of calls. Moreover, protection via puts did not seem top of mind or sought after in the stock last week.
The trading pattern on the stock seems to be throwing up the question, “is FMG likely to break above $5.50 this week, with results being the catalyst?”
Well, for those who like a punt, weakness in the stock early in the week may present some opportunities!
Week ended 3 Feb 2012: Volume in options trading was 2.03m vs 3.596m in equities. This is a drop of -27% in options contrasting with an increase of +62% in equities trading from the week before. This is not a normal pattern in volume between the two.
The last time we saw this similar pattern was in the week ended 2 Dec 2011. That week, options volume was down by -31% with equities higher in volume by +17%. The XJO was at about the same level as well, it closed at 4288 then. The XJO touched a high of 4294 this week. The only difference between the two periods is that in the week ended 2 Dec 11, the XJO had a huge jump of 7% in the week whilst this time, the XJO did a slow climb since early Jan12 of a 4.7% rise.
If we consider the similarities between the two periods of some weight, then perhaps what happened after 2 dec week, may have some implication for the XJO in the upcoming week.
After the 2 dec week, the XJO fell from the 4288 level in 4 consecutive weeks(including the holiday periods) losing a total of -5.5% to 4058.
Though this one observation is not sufficient to call the market down, but what had been evident last week was that options traders had had lack of conviction on the direction of the market, hence took less positions and could also be a defensive move in not taking new positions with a cautious stance.
It’s interesting to see if the 156 points jump on the DOW over the weekend would be sufficient to tip options traders to the bullish side of the market.
As for me, the drop of 5.5% after 2 Dec 2011 would still be at the back of my mind.