Well, good morning to all.
Hope everyone enjoyed their dinners of poached salmon, slept well, and that the sprinkling of pixie dust across a few headboards was just the right amount of elixir to expunge those Kranky-Man attitudes that can be so upsetting to those mom genes of Jill's and Poet's...
Although there has been a great deal of enthusiastic discussion about specific options trades made by this virtual community, I just haven't read a great deal about using unusual options activity in a stock as a precursor or indicator to directional movement. Probably because the options volume on Gorilla and King candidates is so thick and recurring that it's difficult to identify unique or unusual options positions that signal "something's up".
At the risk of getting flamed (because MSGI is no Gorilla or King, but then again, neither is CREE), I just thought I would offer a thing or two about the directional movement I observed as a result of the options activity in that stock.
On January 27, someone purchased options to acquire 90,000 shares of MSGI. They purchased 300 of the May 20 calls (UMSED), 300 of the May 22.5 calls (UMSEX - got your attention yet?), and 300 of the Aug 22.5 calls (UMSHX).
In the space of a few hours, they placed a $450,000 bet on options. I found a few things notable about this purchase.
The stock was trading at around 18 7/8 at the time. The volatility in the options at the time was pretty high - around 97-103 if I recall. So I wondered why someone would buy this volatility instead of just going out and buying the stock.
"Leverage" appeared to be the obvious answer. The same investment in the stock would have only permitted the purchase of 23,700 shares in a non-margined account and twice that number in a 50% margined account. By purchasing the options, this individual acquired the right to buy nearly 4 timex the non-margined number of shares.
I posted this observation on SI's MSGI thread (pretty inactive) and RB's MSGI thread (becoming quite a quaint virtual community with about 30-40 posts a day) under Nothing.But.Net. We're even visited by threadlice!
So the purchase led me to believe that the options buyer in a very thinly traded and expensive options market not only expected the return of his investment, but also a return on it. Also needed for the stock to get north of $26, give or take, just to break even. Would you make that kind of investment in a stock that's been beaten/held down just to break even? Probably not...
Well everyone here readily recognizes that there are far better apparent and more liquid bets on Gorillas and Kings if you have that kind of capital to plunk down on a trade. So why didn't the capital go into options on one of these stocks instead?
Because although smart money sometimes does stupid things, it also does smart things, too. Like knew a story was ready to unfold.
What got my attention was the size of the options trades (300 lots), the fact that they were out-of-the money, were buys at high volatilities, and occurred in the May and August strikes.
So I purchased more stock and options adding to what was already a pretty hefty position. But I've also followed MSGI for the better part of a year, read everything filed with the SEC, met with the company's management, visited their offices, yadda, yadda, yadda.
The options activity and my view of its directional implications was just the "nudge" I needed to get longer.
MSGI closed up 4 points yesterday.
End of lesson....
Mark |
