Stocks quoted in this article:
The 20 stocks listed in the table below have attracted the highest total options volume during the past 10 trading days. Names highlighted are new to the list since the last time the study was run, and data is courtesy of Schaeffer's Senior Quantitative Analyst Rocky White. One name of notable interest is Twitter Inc (NYSE:TWTR), as one skeptical spread trader attempts to turn a quick profit on the stock ahead of weekly options expiration.
Around midday on Thursday, a block of 3,551 contracts traded at the bid price of $0.07 at the Twitter Inc weekly 8/22 46-strike call. Simultaneously, a matching block of 3,551 contracts crossed at the ask price of $0.04 at the weekly 8/22 46.50-strike call. Open interest at both strikes rose overnight by just over 3,500 contracts, indicating these were newly initiated positions. Since the speculator apparently sold the 46-strike calls and bought the 46.50-strike calls, this appears to be a very short-term bear call spread on TWTR.
Essentially, this speculator is looking for TWTR to remain at or below $46 per share today. However, if the stock should rally, the purchased calls at the higher strike effectively limit the upside risk, relative to a naked short call strategy. In this specific scenario, the trader pocketed a net credit of $0.03 per spread, for a total upfront premium of $10,653 (net credit of $0.03 x 100 shares per contract x 3,551 spreads traded). This amount is the maximum potential reward on the play, should TWTR remain beneath $46 through tonight's close -- when these weekly options are set to expire.
Meanwhile, the potential risk is fairly steep. If TWTR should rally to $46.50 or beyond, the trader is looking at a maximum possible loss of $166,897 [($0.50 difference between strikes less $0.03 net credit) x 100 shares per contract x 3,551 spreads traded].
So far, this neutral-to-bearish spread strategy is paying off. Twitter Inc (NYSE:TWTR) is fractionally lower at $45.04 this morning, and the stock has spent the entire month of August pinned below the $45.50 level.