Home Site Map About Us My Account Shopping Cart Help Sign In

Options Update: Is DR Horton's Unusual Put Volume a Play on Earnings?

Option activity on DR Horton (DHI) reveals a spike in put volume

by Joseph Hargett (jhargett@sir-inc.com) 10/9/2008 2:00 PM

Text Size |

Email a friend |

Print |

Keywords:

According to the company's website, DR Horton (DHI: sentiment, chart, options) is slated to release its fourth-quarter earnings figures on November 25. Currently, analysts are looking for a loss of 69 cents per share, down sharply from last year's loss of 16 cents per share. Historically, DHI has struggled in the earnings confessional, matching Wall Street's expectations twice and missing twice for an average miss of 116% for the past 4 reporting periods.

Despite the report being more than a month away, it would seem that options traders are already positioning themselves ahead of the event. Before midday, more than 8,000 puts had changed hands at DHI's November 7.50 put, while another 10,000 had traded at the stock's January 2009 7.50 put. The attention was enough to place DHI on our Intraday Volume Explosion List.

Digging into the volume, I found 2 block trades that appeared to be related, as they crossed on the same exchange at about the same time. Specifically, a block of 6,038 November 7.50 puts traded at $0.75, within 5 cents of the bid price at the time - suggesting that the contracts were sold. Meanwhile, a block of 8,538 January 2009 7.50 puts crossed the tape at the ask price of $1.30 - suggesting that the contracts were purchased.

Anatomy of a DR Horton Put Position

Why would this activity be related to the company's earnings report on November 25? Because November options expire on 21st, 4 days ahead of DHI's earnings report. Assuming that these 2 block trades are related, there are 2 potential strategies that could explain today's volume. The first, and most simple, explanation is that the trader is rolling out the November 7.50 put position into January in order to take advantage of a potential negative reaction to DHI's earnings report. By selling (to close) the 6,032 November 7.50 puts and buying the January 2009 7.50 puts, the trader places the expiration of the position after the event with enough time premium to cushion the blow should DHI exceed expectations.

The second explanation is a bit more involved. Assuming that the trader is opening a fresh position on both the November and January 2009 options, it would appear that he is expecting DHI to hold above 7.50 through November 21 (when the options expire), but anticipates a negative reaction to the company's earnings report. Specifically, the trader sold 6,038 November 7.50 puts at $0.75 or a total credit of $452,850 -- ($0.75 * 100)*6,038 = $452,850. Meanwhile, the trader also bought 8,538 DHI January 2009 7.50 puts for a total outlay of $1,109,940 -- ($1.30 * 100)*8,538 = $1,109,940. The total cost (or debit) for the combined positions arrives at $657,090 -- $1,109,940 - $452,850 - $657,090.

So, how does the trader make a profit on this unusual trade? Optimally, he needs DHI to hold above the 7.50 level through November 21, with the shares plunging before the second half of the trade expires on January 16, 2009. For the second half of the trade to reach breakeven, the trader needs DHI to fall to $6.95 per share (roughly 28% from yesterday's close). We arrive at this figure by subtracting the difference between the sold and purchased put options ($1.30 - $0.75 = $0.55) from the strike of the purchased put ($7.50 - $0.55 = $6.95).

Now that we have the 2 possible explanations for today's unusual put volume out of the way, let's see if the stock's technical picture or sentiment backdrop provide any clues on the potential outcome for a put position on DHI.

Discuss this article:

Post your own comment

Options Update: Dell Inc. Short Strangled Ahead of Earnings

(11/19/2009 2:15:00 PM)

After the close of trading tonight, Dell Inc. (DELL: sentiment, chart, options) is expected to report a third-quarter profit of 28 cents per share, down from earnings of 37 cents per share for the same quarter last year. Historically, the company has bested the consensus estimate in each of the prior four reporting periods, with an average upside surprise of 6.1%. Heading into the event, volume on both sides of the put/call coin has nearly quintupled Dell's daily average. Some 16,500 puts and 31,000 calls have changed hands so far today, with traders focusing most of their attention on the December 17 call and the December 15 put.

read more...

Options Update: A Calendar Spread for Chesapeake Energy Corp.

(11/18/2009 3:10:00 PM)

Chesapeake Energy Corp. (CHK: sentiment, chart, options) has drawn considerable put volume today, as the shares follow the rest of the market lower. Specifically, put volume has swelled to nearly four times CHK's daily average, with more than 17,000 of these bearishly oriented contracts changing hands so far, according to data from our Intraday Volume Explosion List. The most popular strike has been CHK's November 24 put, where some 7,800 contracts have changed hands, mostly at the bid, suggesting these contracts were sold.

read more...

Options Update: An Exxon Mobil Synthetic Short

(11/17/2009 1:10:00 PM)

Option activity has been brisk on oil giant Exxon Mobil Corp. (XOM: sentiment, chart, options) today, as traders react to this morning's upgrade at Barclays. Specifically, the brokerage firm lifted XOM to "overweight" from "equal weight," stating that the company can manage organic growth of more than 3% in 2010. Barclays also boosted its price target on XOM to $92 per share from $90 per share.

read more...

Options Update: A Long Call Ladder on Target Corp. Ahead of Earnings

(11/16/2009 2:30:00 PM)

Ahead of the open tomorrow, Target Corp. (TGT: sentiment, chart, options) is slated to release its quarterly earnings report. Currently, the Street is expecting a profit of 50 cents per share out of the retailing giant, down sharply from last year's profit of 79 cents per share for the same quarter. Historically, TGT has topped the consensus estimate twice, missed once, and matched once during the prior four reporting periods. However, following a pair of solid reports in the prior two periods, TGT has logged an average upside surprise of about 10% during the past year.

read more...

Options Update: Short Straddling The Walt Disney Co. Post-Earnings

(11/13/2009 1:30:00 PM)

Shares of The Walt Disney Company (DIS: sentiment, chart, options) have jumped more than 4% after the company reported better-than-expected fourth-quarter earnings. Earnings reports are not only capable of sparking large moves in a security, but they can also be responsible for lifting implied volatility heading into the event. Judging by DIS' options activity in today's trading, it appears that at least one trader is betting on a drop in implieds following the event.

read more...

Options Update: A Short Ratio Put Spread for Ross Stores Inc. Ahead of Earnings

(11/12/2009 2:45:00 PM)

Ross Stores Inc. (ROST: sentiment, chart, options) is scheduled to release its quarterly earnings report ahead of the market open on Nov. 19. Currently, the Street is looking for a profit of 84 cents per share. Technically, ROST has been on fire in 2009, soaring more than 57% along the support of its 10-week and 20-week moving averages. The shares have slipped in recent weeks, however, calling into question the stock's technical staying power.

read more...

Opening View: Rally Fatigue Sets in Despite Wal-Mart and Hewlett-Packard Reports

(11/12/2009 8:00:11 AM)

Despite a strong quarterly earnings report from Wal-Mart Stores Inc. (WMT) and Hewlett-Packard Co.'s (HPQ) buyout offer for 3Com Corp. (COMS), Wall Street appears poised for a negative start to the regular session of trading. At last check, U.S. stock futures on the Dow Jones Industrial Average (DJIA) were down 44 points at 10,215, or about 42 points below fair value. Futures on the S&P 500 Index (SPX) are about 5 points below fair value, and it would appear that the broad-market index is going to struggle with technical resistance in the 1,100 level once again. The SPX's inability to close above this key technical hurdle in yesterday's trading disappointed many technicians, which could be feeding this morning's sour mood.

With stocks losing favor ahead of the open, the U.S. Dollar Index is once again benefiting from a safe-haven bid, gaining 0.21% to 75.23 in pre-market activity. Meanwhile, the December gold futures contract has added $1.40 to $1,116.20 an ounce. Finally, crude oil for January delivery is down 56 cents, at $79.36 per barrel in electronic trading.

Wal-Mart Stores Inc. (WMT) reported that third-quarter earnings rose to $3.24 billion, or 84 cents per share, from $3.14 billion, or 80 cents per share, a year earlier. Sales rose to $99.4 billion from $98.3 billion. Analysts were expecting a profit of 81 cents per share on sales of $99.2 billion. Wal-Mart forecast fourth-quarter profit of $1.08 to $1.12 per share, and raised its full-year outlook to $3.57 to $3.61 per share. Wall Street is currently looking for earnings of $1.12 per share in the fourth quarter and $3.58 per share for the year.

read more...

Options Update: General Electric Co. Bull and Bear Debit Spreads Abound

(11/9/2009 2:35:00 PM)

Options traders appear to be split down the middle when it comes to prospects for General Electric Co. (GE: sentiment, chart, options). For instance, the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.00 indicates that put and call open interest is practically dead even among options with less than three months until expiration. Furthermore, GE's SOIR also ranks near the middle of its annual range, underscoring the relatively mixed view among options speculators.

read more...

Options Update: Vertical Call Spread for NVIDIA Corp.

(11/6/2009 1:00:00 PM)

After the close of trading last night, NVIDIA Corp. (NVDA: sentiment, chart, options) reported a third-quarter profit of $107.58 million, or 19 cents per share, compared with a profit of $61.75 million, or 11 cents per share, for the year-earlier period. The company blew past the consensus estimate, and guided higher for the fourth quarter. Following the report, NVDA shares jumped nearly 6% higher in after-hours trading, and the stock has added to this lead in today's trading, advancing nearly 7% before noon.

read more...

Options Update: An Iron Condor for Oracle Corp.

(11/5/2009 1:30:00 PM)

The fact that the company's earnings report is now in the rearview mirror hasn't slowed Oracle Corp. (ORCL: sentiment, chart, options) options traders in the least. Overall, both put and call volume has more than doubled the stock's daily average, with traders centering on a quartet of front-month strikes. Specifically, ORCL was bombarded by heavy activity at its November 20 and 21 puts, with the November 22 and 23 calls also receiving considerable attention. More than 1,000 contracts traded on each of these strikes within roughly the first hour and a half of trading.

read more...

SchaeffersResearch.com can alert you to new articles containing your favorite authors, ticker symbols or keywords. Enter your favorite authors, ticker symbol or keyword and click go.

Today's Most Popular Stories

Read

Emailed

Editor's Pick

Options Edge: CF Industries, Solarfun Power, E TRADE Financial, and Conseco, Inc. 11/19/2009 9:29 AM

Options Report: Buying Opportunities Among Internet Retailers 11/19/2009 3:30 PM

Schaeffer's Media Outtake: Thoughts on Hedging, Volatility 11/19/2009 4:15 PM

Market Recap: Chipmakers Blaze the Path Lower on Sector Downgrade 11/19/2009 4:17 PM

Featured Companies

D R Horton (DHI)

Add to Watchlist

Add Alert

Receive FREE access to Schaeffer�s

premier online options magazine!

Podcasting

Videocasting

	Schaeffer's Daily Q&A: What Is Put Selling Nov 20 2009 4:12 PM
Options Stew: A Taste of the Week's Spiciest Pl... View More...

Partner Center

<script language="JavaScript" src="http://c5.zedo.com/jsc/c5/ff2.js"></script><noscript> <a href="http://xads.zedo.com/ads2/r?n=457;c=166;s=1;x=1024;u=j;z=[timestamp]" target="_blank"><img border="0" width="120" height="60" src="http://xads.zedo.com/ads2/x?n=457;c=166;s=1;x=1024;u=j;z=[timestamp]" alt="Click here"></a> </noscript>	<script language="JavaScript" src="http://c5.zedo.com/jsc/c5/ff2.js"></script><noscript> <a href="http://xads.zedo.com/ads2/r?n=457;c=167;s=1;x=1024;u=j;z=[timestamp]" target="_blank"><img border="0" width="120" height="60" src="http://xads.zedo.com/ads2/x?n=457;c=167;s=1;x=1024;u=j;z=[timestamp]" alt="Click here"></a> </noscript>	<script language="JavaScript" src="http://c5.zedo.com/jsc/c5/ff2.js"></script><noscript> <a href="http://xads.zedo.com/ads2/r?n=457;c=168;s=1;x=1024;u=j;z=[timestamp]" target="_blank"><img border="0" width="120" height="60" src="http://xads.zedo.com/ads2/x?n=457;c=168;s=1;x=1024;u=j;z=[timestamp]" alt="Click here"></a> </noscript>	<script language="JavaScript" src="http://c5.zedo.com/jsc/c5/ff2.js"></script><noscript> <a href="http://xads.zedo.com/ads2/r?n=457;c=169;s=1;x=1024;u=j;z=[timestamp]" target="_blank"><img border="0" width="120" height="60" src="http://xads.zedo.com/ads2/x?n=457;c=169;s=1;x=1024;u=j;z=[timestamp]" alt="Click here"></a> </noscript>
<script language="JavaScript" src="http://c5.zedo.com/jsc/c5/ff2.js"></script><noscript> <a href="http://xads.zedo.com/ads2/r?n=457;c=174;s=1;x=1024;u=j;z=[timestamp]" target="_blank"><img border="0" width="120" height="60" src="http://xads.zedo.com/ads2/x?n=457;c=174;s=1;x=1024;u=j;z=[timestamp]" alt="Click here"></a> </noscript>	<script language="JavaScript" src="http://c5.zedo.com/jsc/c5/fo.js"></script><noscript> <a href="http://xads.zedo.com/ads2/r?n=457;c=171;s=1;x=1024;u=j;z=[timestamp]" target="_blank"><img border="0" width="120" height="60" src="http://xads.zedo.com/ads2/x?n=457;c=171;s=0;x=1024;u=j;z=[timestamp]" alt="Click here"></a> </noscript>	<script language="JavaScript" src="http://c5.zedo.com/jsc/c5/ff2.js"></script><noscript> <a href="http://xads.zedo.com/ads2/r?n=457;c=172;s=1;x=1024;u=j;z=[timestamp]" target="_blank"><img border="0" width="120" height="60" src="http://xads.zedo.com/ads2/x?n=457;c=172;s=1;x=1024;u=j;z=[timestamp]" alt="Click here"></a> </noscript>	<script language="JavaScript" src="http://c5.zedo.com/jsc/c5/fo.js"></script><noscript> <a href="http://xads.zedo.com/ads2/r?n=457;c=173;s=1;x=1024;u=j;z=[timestamp]" target="_blank"><img border="0" width="120" height="60" src="http://xads.zedo.com/ads2/x?n=457;c=173;s=0;x=1024;u=j;z=[timestamp]" alt="Click here"></a> </noscript>

Monday Morning Outlook:
Prepare for the investing week ahead. Every week, Bernie and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves.

Market Recap:
At the end of every market day, we review the trading day in detail, covering major events and key market developments. Don't miss this critical, timely and insightful report.

Opening View:
Every morning, our research staff analyzes the prior day and the overnight markets, and monitors the morning wires to give you an accurate preview of the day to come. delivered to your inbox before the opening bell.

First Name Add your first name Last Name Add your last name Email Add a valid address Password Min. size 4 chars

I would like to be contacted periodically by Schaeffer's Investment Research concerning its own products and services, and those of carefully selected advertisers. I understand that I can opt-out of further messages at any time.

� 2009 Schaeffer's Investment Research, Inc. 5151 Pfeiffer Road, Suite 250, Cincinnati, Ohio 45242
Phone: (800) 448-2080 FAX: (513) 589-3810 Int'l Callers: (513) 589-3800 Email: service@sir-inc.com