JPMorgan Warrant Sale Spurs Long-Term Option Buying

ONN’s Most-Active Options Update is our daily listing of the “Lucky 13″ equities with the heaviest daily option volume (based on a 20-trading-day rolling average).

Friday’s Notable Option Activity–

JP Morgan (JPM):

Friday’s biggest story from the Lucky-13 list was the warrant sale of JPM common stock, which concluded Thursday evening. Jared Levy detailed this auction on Friday morning, but suffice to say, about 88 million shares at $10.75. The strike price on these shares was $42.40 – the maturation date is October 28, 2018.

With all of this excitement going on, it is logical that options pits were ripe with activity in JPM, particularly at longer-term strikes. The January 2012 50-strike call (out of the money by about $9) saw more than 44,000 contracts trade versus open interest of 18,815, suggesting that the lion’s share of these contracts were traded to open. They also likely traded on the buy side, coming across the tape in large blocks during the first 90 minutes of the trading day.

Our Chief Investment Strategist, Jud Pyle, noted that “Intuitively you would think that long-dated implied volatility would be for sale the day after an issuance of warrants, but I think the amount of selling done before the warrants were issued caused more buying of implied than selling now that the event has occurred.”

Another large investor bought the January 2011 50-60-70 long butterfly, paying $1.08 for the spread. Specifically, shortly before noon Eastern Time, this investor bought 25,000 January 50 calls (for about $2.58 each), sold 50,000 60-strike calls (for $0.94 each), and bought 25,000 70 calls (for $0.38 each). Investors using the butterfly strategy typically expect modest movement in the underlying. Maximum profit is achieved if JPM is trading right at 60 at expiration.

Apple (AAPL):

Apple shares shed nearly 1% in Friday’s trading to $194.67, and volatility came in a bit as well, with the December 195 straddle closing at $5.94 on the day, down from $6.95 the day before when AAPL was trading at $196.43. This is similar to the current situation in Potash; the stock was on a tear higher for much of the summer and fall but is now consolidating sideways.

On the options front, the January 180 puts saw more than 12,000 contracts trade on Friday, versus open interest of 22,130. It is interesting to note, however, that the largest single block that traded during the day was 450 contracts. It appears as though the majority of these were initiated on the sell side, and many were marked as “spread” trades. There was notable volume across several strikes in Apple, particularly in the front-month series, but while it is hard to pinpoint the other side of this spread trade, the net effect is that volatility in January came in.

Research in Motion (RIMM):

Less than a week before its quarterly earnings report, volatility is stabilizing in RIMM shares. The near-the-money December 65-strike straddle closed at $5.62, as the options market expects a move of $5.62 (8.8% higher or lower) in RIMM between now and Friday afternoon. Earnings are due after the close on Thursday.

In Friday’s session, the January 100 call was notably active, as more than 26,000 contracts changed hands on open interest of 54,000. Shortly before 2:00 PM Easter, blocks of 12,000 and 11,000 traded near the ask price at 10 cents per contract.

The call option closed up two cents on the day despite a 3% drop in the shares to $63.84; it is therefore likely that these far-out-of-the-money options were purchased, possibly to close. In other words, these investors may have been closing a bearish bet (or a bearish hedge) in order to free up capital.

The ONN Lucky Thirteen: The 13 stocks with the heaviest option volume during the past 20 days.

1. Bank of America Corp. (BAC)
2. Apple Inc. (AAPL)
3. Microsoft Corp. (MSFT)
4. General Electric Co. (GE)
5. JPMorgan Chase & Co. (JPM)
6. Research in Motion Ltd. (RIMM)
7. Wells Fargo & Co. (WFC)
8. Intel (INTC)
9. Goldman Sachs Group (GS)
10. Amazon.com (AMZN)
11. American International Group (AIG)
12. Potash (POT)
13. Dell (DELL)