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Exchange operator CME Group Inc (NASDAQ:CME - 60.42) was the target of a large-scale options trade earlier today, as a bullish speculator used calls and puts to bet on longer-term upside. With the shares touching a new annual high today, call volume has spiked to 15 times the normal level, while put volume is outpacing what's typically seen by a factor of 13. In focus appears to be a synthetic long strategy -- also known as a risk reversal -- that went off in the January 2014 series.
Specifically, matching blocks of 20,000 contracts traded at the January 2014 65-strike call and 52-strike put at the same time on the NASDAQ OMX PHLX (PHLX). Information from Trade-Alert indicates the puts were sold to open (for a credit of $2.50 per contract), while the calls were purchased to open (at a premium of $2.25 per contract). All told, the investor collected a net credit of $0.25 per spread, or $500,000 for the lot of 20,000.
The chart below shows the profit/loss diagram of this strategy at expiration. If CME is trading between the two strikes in question, the trader simply keeps the modest credit collected. Outside of this $52-to-$65 range, the strategy behaves similar to a long stock purchase, with unlimited gains possible above the call strike, and losses unlimited down to zero below the put strike.
In other words, the investor hopes to see CME rally beyond the $65 level between now and mid-January of next year, but is content to collect a small reward, as long as the stock stays north of $52.
This large-scale bullish trade flies in the face of recent trends. CME's Schaeffer's put/call open interest ratio (SOIR) stands at 1.20, indicating that put open interest trumps call open interest by a 6-to-5 margin among options expiring within the next three months. What's more, this ratio is higher than all but 2% of the last year's ratings, suggesting the options crowd has rarely been more put focused.
In similar fashion, the 10-day put/call volume ratio of buy-to-open activity on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and PHLX stands at 1.32, in the 71st annual percentile. Put simply, 132 puts have been bought to open for every 100 calls during the past two weeks, and this ratio is higher than more than two-thirds of all data points from the past 12 months.
As noted above, CME stretched to a new 12-month high today, and has gained roughly 20% in 2013 so far. From a longer-term perspective, however, the stock has been largely range-bound. In fact, the shares have bounced between $50 and $70 for most of the time since mid-2009. Today's spread seller could be hoping a break from this sideways pattern is imminent.
In the news, CME is a prominent player in the rumor mills, as sources indicate CME has approached Frankfurt-based exchange Deutsche Boerse about a potential merger. Deutsche has so far refuted the claims, but if a deal were to happen, CME would then have control of the formidable Eurex futures operations.