During the Pit Report a few of our option mentoring students asked me to take a look at POT and see if there were any bullish trades that might have lead us to believe that POT was going to receive a takeover bid today. I decided to ignore the major bidder of POT calls that was floating around mid market yesterday (he didn't get filled, at least not completely) and only look at the trades that filled. I pulled up LiveVolPro Time and Sales; there were certainly a few bullish trades, a buyer of a Jan 120-160 call spread for instance. However, there was one trade that struck me; at first appears not bullish, but upon further examination is very bullish. Anyone who has seen me teach or been mentored by me will might recognize the trade. It’s a trade I learned from another trader that I have passed onto my option mentoring students; it’s a collar with a call kicker.
Yesterday a customer:
Bought 7000 of the Sep 105 puts for 2.65
Sold 7000 of the Sep 110 calls at 6.10
Bought 7000 of the Sep 120 calls for 2.40
The trade on its own actually appears bearish (see below)
However, what if I was long 700,000 shares of POT in the 107-108 range, then what would the trade look like?
It would like a massive winner today (my guess, that guy took the rest of the day off). This was a trader that wanted to have serious protection for a long position below 105, not pay for the trade, and make money if POT got bought out. It’s a really nice trade. It’s actually a concept we use at Option Pit when we are mentoring. It's also a classic example of how difficult it can be to read paper. Do not simply look at calls trading and assume that the trade is bullish.
Don't forget to check out the AM Pit Report given free every day, and email me if you have interest in attending a special Webinar event I am doing with Jeff Quinto of ElectronicFuturesTrader.com. We will be having a discussion on futures and the roll between months and reading order flow. This is an invite only event, email me Mark@optionpit.com, or call (888) Trade-01 if you have interest.
Time and Sales from LiveVol
Charts from ThinkorSwim
