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Option Brief: AOL, Inc. (NYSE:AOL) is seeing unusual activity in its option pits today, with most of the action dedicated to longer-term bets. So far, about 11,000 puts have traded -- 18 times average daily volume -- while 20,000 calls have crossed the tape, exceeding typical intraday volume by a stunning factor of 49. AOL shares, meanwhile, are trading nearly 2% higher at $33.62.
A massive three-way spread hit the tape right around noon on the NASDAQ OMX PHLX (PHLX), totaling 30,000 contracts. Volume outweighs existing open interest on all three strikes -- the April 2014 40- and 46-strike calls and the April 2014 28-strike put -- suggesting opening orders. The puts and the higher-strike calls traded at or near the bid price, and the 40-strike calls traded in between the bid and the ask. The trader in question may be purchasing a long call spread and financing the deal by selling out-of-the-money puts. (Monday's open-interest translations will likely provide further insight.)
If this is the case, he would have actually collected a credit of 47.5 cents for each three-way spread. The strategy is essentially a neutral-to-bullish bet that AOL will stay north of $28 (or ideally advance as far as $46) through the next six-plus months. The maximum risk on a downside move is equal to the strike price of the sold puts less the net credit of 47.5 cents, or roughly $27.53 per spread.
In recent history, AOL, Inc. (NYSE:AOL) option speculators have actually favored the put side of things. During the last 10 sessions at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and PHLX, 4,391 puts have been purchased to open, compared to just 495 calls. The resultant 10-day put/call volume ratio of 8.87 sits only 1 percentage point away from an annual bearish peak.
The stock is also popular among short sellers; more than 11% of its available float has been sold short. It's possible, then, that a portion of any recent bullishly slanted options activity may have been executed by short sellers looking to hedge their bearish positions.
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