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 today is Yahoo! Inc. (NASDAQ:YHOO), as option traders place their bets ahead of Alibaba Group Holding Ltd's (NYSE:BABA) initial public offering (IPO).
Excitement is building ahead of Alibaba's IPO, with shares of the e-commerce concern slated to begin trading tomorrow on the Big Board. Considering Yahoo! Inc. is a major stakeholder in BABA, there's a lot happening in the stock's options pits today, with overall volume running at nearly three times the average intraday pace. Against this accelerated demand, the equity's 30-day at-the-money implied volatility (IV) is docked at 49.2% -- just 4 percentage points from the top of its annual range.
One eleventh-hour speculator is apparently hoping for IV to drop off tomorrow, in the wake of the highly anticipated event. Specifically, one block of 1,282 September 42 puts was sold for $1.19 apiece, while a symmetrical block of September 43 calls was sold for $0.91 each. IV soared at each leg, suggesting a short strangle was initiated for a net credit of $2.10 per pair of options.
Ideally, YHOO will finish in between the two strikes at tomorrow's close -- when front-month options expire -- in which case, both legs will expire worthless, and the trader can retain the initial net credit as her full potential reward. However, she stills stands to profit if the stock is docked between the two breakeven rails of $39.90 (sold put less net credit) and $45.10 (sold call plus net credit). On the other hand, she could also be hoping IV takes a plunge tomorrow, which would make it cheaper for her to buy back both legs.
Elsewhere, another experienced options trader appears to have initiated a long put spread with a twist. Shortly after the open, a block of 3,493 October 37 puts traded closer to the bid price for $0.36 apiece, suggesting they were sold, while an identically sized lot of 3,493 October 42 puts went off near the ask price for $2.08 each, indicating they were bought. Simultaneously, the same speculator looks to have sold a symmetrical block of October 47 calls for $1.02 apiece, resulting in a net debit of $0.70 per trio of options.
Had she simply initiated the bear put spread outright, her net debit -- as well as her maximum risk -- would be $1.72 per pair of puts. However, by selling the deep out-of-the-money calls, she decreased her cost of entry, and increased her breakeven mark to $41.30 (bought put minus $0.70 debit) compared to $40.28 (bought put minus $1.72 debit) had she solely played a long put spread. However, she also increased her risk, and should YHOO rally past $47 by the close on Friday, Oct. 17 -- when back-month options expire -- she could risk assignment on the sold calls, and face theoretically unlimited losses.
In today's session, Yahoo! Inc. (NASDAQ:YHOO) was last seen 1.6% lower at $41.91. However, the equity has had quite a run up the charts in the weeks leading up to BABA's IPO, and as such, YHOO's 14-day Relative Strength Index (RSI) is docked in overbought territory at 73. Elsewhere, sources are saying BABA will be priced in a range of $66 to $68 per share.