It doesn’t happen often, but three of America’s most followed large-cap stocks led the way in Wednesday’s unusual options activity.
Netflix (NFLX), Honeywell Aerospace (HONA), and Microsoft (MSFT) had the top three Vol/OI (volume-to-open-interest) ratios for options expiring in six days or more: 205.13, 101.70, and 78.80, respectively. This was on a day when the options volume was woefully low at 44.6 million, just 71% of the 90-day average.
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Perhaps we’ve learned that this is what happens when volume is low; the best-known names rise to the top. I’ll be watching for this trend in the future.
As for these large-cap stocks, their options each saw significant trading yesterday, pointing to three different options strategies, two of which are more esoteric than the average retail investor might be comfortable with.
Nonetheless, despite writing options for several years, they provide good learning experiences for me, and hopefully for you too.
Netflix (NFLX)
As I said in the introduction, Netflix’s unusually active Jan. 21/2028 $42 put option led the way yesterday with a Vol/OI ratio of 205.13, more than double Honeywell Aerospace in second place at 101.70.
The put volume of 24,000 was 14% of Netflix’s daily volume of 170,782, which was just 53% of its 30-day average volume.
The three trades below (actually two) include the $42 put. Together, the three make up the components for a Risk Reversal options strategy, often termed a Protective Collar.
This strategy is used to hedge a long position, in this case, in NFLX stock. It involves simultaneously selling a call — which is a Covered Call because the institution typically owns the stock — and buying a protective put to limit the downside.
So in this instance, the institution sold Jan. 21/2028 $124 calls in two trades of 6,000 and 1,500 for premium income of $6.16 ($4.62 million) [$4.62 million premium / 7,500 contracts / 100], while also buying 24,000 Jan. 18/2028 $42 puts for $1.20 ($2.88 million), for a net credit of $4.96 ($1.74 million).
Because it’s not an even put/call ratio at 3.2 puts for every call, the institution is using the unevenness to protect the downside over the next 17 months on 2.4 million shares owned.
As you can see from the share prices on the trades, the puts are 48.6% OTM (out-of-the-money), while the calls are 51.7% OTM.
It’s possible, given Netflix stock is down 33% over the past year, that the owner of the 2.4 million shares bought the stock at some point between the 52-week low of $65.08 in mid-July and sometime in early August. However, it’s just as likely that the owner has owned the shares for years and wants to exit the stake with a profit.
The maximum loss on this risk reversal or protective collar is $93.4 million [$42 put strike price - $81.64 share price + $4.96 net credit * 24,000 contracts * 100].
Based on the 17-month duration, I would guess the institution is betting the move up or down will play out long before expiration in January 2028, making the maximum loss a moot point.
Honeywell Aerospace (HONA)
The unusually active call from yesterday was the Dec. 18 $210 strike price, which, as I mentioned, had the second-highest Vol/OI ratio at 101.70. The volume of 20,035 accounted for 64% of the stock’s volume on the day, which was 6.8 times the 30-day average.
As you can see above, all but 47 contracts traded on the Dec. 18 $210 call were for one trade at 1:27 p.m. ET. The second trade at the same time was for the Dec. 18 $175 call. It accounted for 99.6% of the volume.
We’ve got two calls with the same expiration but different strike prices. This points to a Long Call Ratio Spread.
The long call ratio spread looks to profit from a big move in HONA stock at a low initial cost. The strategy combines selling a short call and buying two long calls of the same expiration but with a higher strike. In this case, the institution is selling one $175 call for $13.62 in premium, while spending $9.40 for two $210 calls, for a net credit of $4.22 per 1:2 ratio, or $4.22 million.
The strategy is effectively the combination of a Bear Call Spread (bearish)--selling 9,994 $175 calls and buying 9,994 $210 calls--while also buying 9,994 $210 calls (bullish).
In this situation, there are two breakeven points:
1. The $175 breakeven = $175 strike price + $4.22 net credit = $179.22
2. The $210 breakeven = $210 strike price + maximum risk [$210 strike price - $175 strike price - $4.22 net credit] = $240.78
The maximum loss would occur if the share price at expiration in December is right at $210. That’s because the entire 19,988 $210 calls would expire worthless, while the short $175 calls would be $35 ITM (in-the-money) for a maximum loss of $30.78, or $30.76 million.
The maximum profit is unlimited. For example, if the share price at expiration is $240, the short $175 calls expire worthless, while the long $210 calls are worth $34.22 [$240 share price - $210 strike + $4.22 net credit], or $68.4 million.
Microsoft (MSFT)
The Microsoft Nov. 20 $625 call had the third-highest Vol/OI ratio yesterday at 78.80. The volume of 14,972 was a small piece of Microsoft’s options volume on the day of 579,131.
However, the 14,874 contracts traded at 12:19 p.m. ET were 99.4% of the Nov. 20 $625 call’s volume. Combined with the 14,874 contracts traded at the same time for the $545 call also expiring on Nov. 20, this points to a Bull Call Spread.
The bull call spread is bullish. It involves buying a call option and selling a call option at a higher strike price. It is the opposite of the bear call spread mentioned earlier. In this instance, the institution bought 14,874 Nov. 20 $545 long calls OTM and sold 14,874 Nov. 20 $625 short calls OTM for a net debit of $10.20, or $15.23 million.
Like the bear call spread, the bull call spread is a defined-risk strategy that caps upside gains while defining maximum downside loss. In this example, the maximum profit is $69.80 per contract [$625 strike price - $545 strike price - $10.20 net debit], while the maximum loss is $10.20.
So, the institution could have bought 14,874 $545 call contracts on their own for $18.24 million. If the MSFT share price at expiration in November is $700, the institution’s profit is $212.31 million. If they add the short $625 call, the profit is $103.82 million, considerably less than a call on its own.
The $3.0 million in premium received reduced the cost of the long call by 16.5%. The expected move by Nov. 20 is 9.98%. At the $494.19 trade price from yesterday, the expected move puts the share price at $543.51 at expiration, nowhere near $625 or $700, for that matter.
Wise strategy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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