Put Trading Spikes on Devon Energy

02/27/2009 10:26 am EST

Focus: OPTIONS

Nick Perry

Equity Options Trader, Schaeffer's Investment Research

Devon Energy (DVN) has seen a recent spike in call trading. The March 45 put has seen more than 3,000 contracts cross the tape on open interest of 5,205 contracts. For this option, several blocks crossed the tape at 11:11 am eastern time, totaling 2,500 contracts at a bid price of $1.95, which indicates that these contracts were most likely sold. Meanwhile, the April 45 put saw more than 4,114 contracts cross the tape today on open interest of 4,828 contracts. Several blocks changed hands at 11:05 am eastern time, totaling 4,000 contracts at an ask price of $3.30.

In this instance, there are two potential scenarios. First, the trader could be rolling out his March options by closing out an existing position and moving into the April series because he believes he needs more time for his position to play out. Or, the trader could be opening a calendar spread.

The most ideal calendar-spread trade occurs when near-month implied volatilities are high relative to options with a long life. Optimally, a spread trader will initiate a calendar spread when the stock is expected to trade in a narrow consolidation pattern over the short term, reducing implied volatilities on the shorter-term sold option (or increase on the purchased option). The best-case scenario for a calendar spread is that the sold option expires out of the money, while the purchased option retains time premium.

By Nick Perry of Schaeffer’s Trading Floor Blog

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