Still wondering how you can profit by paying attention to institutional options flow?
Every day our specialized tools pick up thousands of significant trades made by the most informed, well-capitalized, sophisticated traders. Strategies range from simple bullish and bearish directional bets to more complex multi-leg strategies designed to express a very specific view of future stock levels. Some trades exploit the leverage of options as a cheap way to play a stock or market. Others attempt to profit from the fact that options are wasting assets that lose value over time. Still other traders are trying to profit from changes in market volatility with index trading, including options on the CBOE Volatility Index (.VIX).
One strategist seems to have reaped a windfall profit Thursday after closing a substantial put spread on retailer Urban Outfitters (URBN). A put spread, this case, is simply the purchase of a put and the sale of a put with a lower strike price. Like simply buying a put option, it makes money when the price of the underlying asset (URBN, in this example) moves lower.
We highlighted the trade in question on July 22 when shares of the retailer were around $32 per share. On that date large blocks of 30 and 15 strike puts expiring in January 2010 traded for $5.60 and 90 cents, respectively. Since the volume in these two contracts exceeded 30,000, it was certainly noteworthy. In addition, the 30s were observed trading on the askside of the quoted market, and the 15s on the bid, with our comments noting that the action had "all the characteristics of bear put spread trading, perhaps on the view that URBN will make a substantial move lower between now and January 2010 options expiration."
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This trade quickly paid off for the buyer as URBN shares were among the worst performing retail stocks, and hit a 52-week low of $14.37 Thursday, or 55 percent below the levels seen when the spread was opened. The strategist in question appears to have been satisfied with the decline and opted to close the position well before the January 2010 options expiration.
The liquidation took place at 12:30 ET when a block of 40,000 January 30 puts traded on the bid for $15.70 and a similar number of 15s traded mid-market for $4.70. It is likely that tomorrow's open interest will confirm the activity was part of a closing trade and, if it is a simple liquidation, the trader banked a hefty profit from the strategy, excluding and stock hedge and commissions (which is considerable on 80,000 contracts!). That is, the spread that was opened for $4.70 was closed for $11.00, netting a profit of more than $25 million.
Frederic Ruffy, Whatstrading.com
HenrySchwartz, Trade Alert, LLC
