Stocks quoted in this article:
Of the 20 equities with the heaviest options volume in recent sessions, three names of notable interest this afternoon are Cisco Systems, Inc. (NASDAQ:CSCO - 20.89), Zynga Inc (NASDAQ:ZNGA - 3.21), and Constellation Brands, Inc. (NYSE:STZ - 43.76). Here is a quick look at today's interesting option activity in these options pits.
CSCO speculators are staying busy as the predicted volatility crush occurs on the heels of last night's earnings. According to Trade-Alert, at-the-money implied volatility has dropped nearly 40% to a 52-week low. Meanwhile, two of the most active strikes are the February 21 put and March 20 put, which have respectively seen roughly 15,000 and 40,700 contracts change hands. It is possible that some traders may be selling to close the soon-to-expire February positions while opening up new bearish bets in the March series. The volume-weighted average price (VWAP) for these later-dated 20-strike calls was $0.19, giving the position a breakeven price (at expiration) of $19.81 (strike less VWAP).
Once again, ZNGA is seeing some longer-term action in its call pits, but today, traders are initiating orders on the sell side. More than 8,000 contracts have traded on the January 2014 4.5-strike call, all of which crossed at the bid price. As volume more than doubles open interest, it appears as though these out-of-the-money options are being sold to open, on the belief that ZNGA will not muscle through the 4.5 strike during the next 11 months. This may be part of a covered call play, where shareholders are setting an acceptable price at which to exit their positions. In the meantime, they collect a modest premium, as the VWAP was $0.44. The current delta of this option is 0.42, reflecting a 42% chance of being in the money by expiration on Jan. 17 of next year.
Getting drawn into the Anheuser-Busch InBev NV (ADR) (NYSE:BUD)/Grupo Modelo merger drama has made STZ an alluring name among option traders. Today, with the stock rocketing up more than 35% to a new annual high, puts have taken center stage, with about 184,000 contracts changing hands. This is more than 14 times what is usually expected on a typical trading day. Most active is the March 35 strike, where nearly 28,000 contracts have traded versus open interest of under 6,600. Several large blocks have traded off the ask price, and implied volatility has zoomed 30 percentage points higher. It is therefore likely that traders are buying these out-of-the-money puts to open. This could be a purely speculative bet that the stock could fall just as quickly as it has risen (should terms of the deal begin to deteriorate). It could also be STZ shareholders protecting recent profits. This would be a fairly cheap hedge, too, as they traded at a VWAP of $0.27.
The 20 stocks below have attracted the highest options volume -- in the front three-months' series -- during the past 10 trading days. Data is courtesy of Schaeffer's Senior Quantitative Analyst Rocky White.