Schaeffer's Trading Floor Blog

Lessons Learned from Hewlett-Packard (HPQ) Option Traders

HPQ call buyers win big after earnings

by 2/25/2013 8:29 AM
Stocks quoted in this article:

Looks like someone's bunny had a good nose in Hewlett-Packard Company (NYSE:HPQ) ahead of earnings.

With the stock in the high 16s and low 17s on Wednesday, volume in the weekly 2/22 17.5-strike calls exploded. Almost 21,500 contracts traded, versus pre-existing open interest of just 5,124 as per Livevol. Another 14,000 contracts traded on Thursday, bumping up open interest to 31,864. So the total open-interest gain from Wednesday to Friday at this strike was nearly 27,000 contracts.

Sometimes you get volume like that without much change in open interest as the action is simply traders scalping up and back. It happens in Apple Inc. (NASDAQ:AAPL) often, for example. That wasn't the case here though -- it was clearly straight purchases, as Livevol notes that open interest spiked to over 21,000.

And guess what? It turned into quite the prescient purchase.

HPQ traded as high as $19.83 on Friday, and closed at $19.20. The calls traded at an average of roughly $0.30, meaning the buyers generally earned somewhere between $1.00 and $2.00 on the purchase, so one heckuva payday on a cheap shot.

So … should we alert the authorities?

Well, it is certainly odd order flow. But it's tough to know where inside info starts and a relatively cheap dollar shot (that happened to work out) ends. I mean, we're talking about a net purchase of roughly $630,000 worth of calls on Thursday. That's a ton of money to some, a rounding error to others. Yes, it's money that can evaporate literally overnight, but as always, it is tough to know the meaning to the actual buyer.

More relevantly though, should you follow order flow like this? I tend to look at put or call volume as a contra-tell in an index, but in individual names I'm certainly open to the "smart money" argument. The problem is that it is much more meaningful when the trades are opening than simply active up-and-back trading. And that's not always so simple to decipher intraday.

A busier option (like AAPL) is more likely to see active trading, and thus spikes in order flow are less noteworthy. In a small name, it is almost certain that if call volume is spiking, someone thinks they have good info. The problem with HPQ is it's a somewhat middle-ground name. It is easy in hindsight to see someone had a notion about the HPQ number, but in reality, there are likely lots of mid-size, mid-interest names that see action like this pre-earnings … and not all work out so well.

I'd certainly pay attention any time you see trading saction like this, I just wouldn't recommend trying to tail it without further research.

Disclaimer: The views represented on this blog are those of the individual author's only, and do not necessarily represent the views of Schaeffer's Investment Research.

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