Schaeffer's Trading Floor Blog

Time Warner Cable Inc (TWC) Options Volume Picks Up Ahead of Merger Hearings

TWC option traders have been fond of buying and selling puts

by 3/6/2014 2:46 PM
Stocks quoted in this article:

Put players have been increasing their presence in Time Warner Cable Inc's (NYSE:TWC) options pits of late to place both bearish and neutral-to-bullish bets on the entertainment guru. On the bearish side, the stock's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.37 ranks in the 76th percentile of its annual range. Simply stated, puts have been bought to open, relative to calls, at an accelerated clip in recent months.

The good news for this specific batch of option buyers is that premium at this out-of-the-money (OOTM) strike is affordable at the moment, from a volatility perspective. Specifically, implied volatility (IV) for the March 135 put is deflated relative to the stock's 20-day historical volatility (17% vs. 28.2%). This theory of relatively cheap premium on TWC's front-month options is echoed in the security's Schaeffer's Volatility Index (SVI) of 17%, which is lower than 81% of similar readings taken in the past year.

Elsewhere, on the neutral-to-bullish side, traders at the ISE, CBOE, and PHLX have sold to open 1.59 puts for each one they've purchased during the last 10 weeks. In particular, a number of speculators have honed in on the April 120 put, which has seen north of 7,000 short puts initiated since early December. In other words, this group of option traders is betting on TWC to maintain its perch atop $120 through the close on Thursday, April 17. This will allow the puts to expire worthless, and the traders to pocket the net credit collected as their full potential reward.

Now appears to be an opportune time to sell premium at this out-of-the-money strike, as its IV is inflated relative to equity's 40-day historical volatility (28% vs. 22.5%). Simply stated, premium is more expensive than usual, relatively speaking.

On the charts, TWC has posted an impressive 58% year-over-year gain. In fact, the stock hit a record peak of $147.28 on Feb. 14, after announcing a potential merger with Comcast Corporation (NASDAQ:CMCSA). Meanwhile, the equity has not breached the $135 mark on an intraday basis since Feb. 12, and has not traded south of $120 currently the site of its 200-day moving average -- since Nov. 21.

Off the charts, it was announced today that Bill Baer, a leading U.S. antitrust regulator, has been recused from reviewing the TWC/CMCSA merger, after previously representing General Electric Company (NYSE:GE) during CMCSA's acquisition of NBC Universal. The Senate Judiciary Committee is scheduled to begin a hearing on the partnership on Wednesday, March 26.

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