For every option traded, there is a writer and a purchaser. Time premium works against the purchaser and is to the writers benefit. However, there normally will be no CALL writer when there is no premium. However, what happened to the premium??? This is either due to there being zero volitility in the underlying stock or more interest in writing CALLs than purchasing CALLs. Since I see significant open interest, I suspect that there have been more CALL writers that purchases. Yes, I know the two equal, but I am talking shorthand for supply and demand here. Having many interested in writing CCs on this stock should come as no surprise. So if you see the volume causes open interest go up but premium goes down or remains low, then you have a situation where someone is writing calls which out number the purchase interest in that option.
As far as CCs go, this CC will provide two things for the writer: hopefully a premium, and a partial hedge for the stock going down any lower. Now why would someone expect this stock to go down any lower after a positive earnings announcement which lifted the stock in price? There is simply nothing that would help move this stock up any further. I think it is a safe bet that the stock will remain the same or move lower. So now the CC can be used to capitalize on this anticipated downward movement of stock despite the lack of premium. The worst case is that they cover for a neglegible profit. Many will do this because they think it is better than just sitting there and doing nothing with their paper losses.
Next the CALL option is a way to hedge a short position. This is likely to happen after a news announcement which helped the stock gain in value percentage wise as much as IFMX did. The Mar 5.0 CALL has 15,000 open positions. But 15,000 options is equal to 1.5M shares or approximately $12 million dollars. This is allot of money for one individual, so many individuals are probably involved in this case. The stock needs to go down enough to make it worth their efforts and risk. Do you think there is an interest in shorting a stock near 5 that has already dumped to 5 and "settled", and is now at over 50% greater than where it was recently at 5? If there are shorters, they would of closed their position when the stock began to move up and could of come back into the picture when the stock topped out at near 9. In this case, the Mar 5.0 CALL options would be a very poor choice for hedging a short position like this. For that matter, the option stats support that there are more interested in writing the CALL option then purchasing that option. A shorter hedges through the purchase of CALL options.
A look at the stats indicates that there has been a very substantial reduction in open interest of the Feb 5.0 CALLs, which is no surprise. Now lets see the open interest of the Mar CALLs:
Mar 10 Bid=0.12 Ask=0.25 Open Interest=5068 Premium=approx 1/4
Premium very small. This would not be a good choice for a CC writer, even though it is "out of the money". Matter of fact, I do not think any more open positions can be created in an option selling this low.
Mar 7.5 Bid=1 Ask=1 Open Interest=4923 Premium=approx. 1/2
This would be the best choice for CC writers if they were to write a CC right now. It is "in the money" but at this point in time unlikely to be called. This is risky, but if the stock price moves down further, which is more likely than IFMX moving up further, then they can cover for at least a small profit.
Mar 5.0 Bid=3 3/8 Ask= Open Interest = 12,258 Premium=approx. 3/16
Premium very small. This also would not be a good choice for CC writers. But this does not tell us what happened in the recent past with this option. However, given that there were over 30,000 open interest in Feb 5.0 CALLs, and now there are the bulk of open interest in Mar 5.0 CALL, where do you think these CC writers went to? Furthermore, this also can be considered an "out of the money" CALL for those who picked the stock up at just under 5 which the stock visited not so long ago.
So I suspect many have rolled over from the Feb 5.0 to the Mar 5.0. One reason is that this is a CC writer who is long in the stock and their cost basis remains the same or actually lower than it was in the past. This would imply stock holder who entered at or below 5. Other CC writers are probably writing the Mar 7.5 options. This also may be multiple short positions being hedged. However, why would a hedge be used that is over 3 points "in the money"?? Also as mentioned earlier, the shorts at 5 are likely to be out of the picture now and any remaining shorts would have shorted closer to the stock price of 8. This would make the 7.5 or the 10 strike price much more attractive to them.
So I think the bulk of the CALLs are CC writers who have a long position in IFMX that have rolled over from the Feb 5.0 CALL to the Mar 5.0 CALL. I think the possibility of using the Mar 5.0 CALLs as a hedge to a current short position is very unlikely.
Bob Graham |
