Chris Tyler, Optionetics.com
April 8, 2011
Online and mostly southbound travel outfit Expedia (EXPE) is atop the Nazí100 Percentage Leaders board with gains of nearly 11% Friday. Bulls taking passage in the shares are applauding the companyís decision to split itself into two separate entities. The hope is Expedia's TripAdvisor spin-off; will mean the sum of its parts is worth more than if just lumped together.
In Expediaís options, the action is a bit more of a puzzle as heavy traffic of more than 116,000 contracts has been mostly evenly matched as evidenced by todayís put/call reading of 1.15. Much to the surprise of no one, thereís been evidence of both fresh and maybe closing of positions but also a handful of larger spreads dominated by one spied being put up in the May 27 call and May 23 put.
With nary any open interest in either strike, the 14,500 contracts looks to be opening with blocks of 10,000 and 2,500 going up for $0.30 and $0.35 respectively and accounting for about 85% of the total volume. The question though, is what type of spread is the initiating trader actually booking?
When equal parts of put and call volume are involved in the same trading month and the activity is concentrated in just two out-of-the-money strikes, there are three options, pardon the pun, which other interested parties like ourselves, could be looking at. Generally, traders will see a strangle, either long or short, as being behind the activity, if implieds have moved a good deal lower or higher during the session.
As much, with at-the-money implieds dropping from about 36% to near 30% in the May contract, the assumption that a short strangle was initiated by customer paper is a definite contender. Apparently too and helping make the case (somewhat), according to OptionMonster, both prints were on the bid price at the time the block prints were put up.
Nonetheless, there are still two other possibilities to consider, though neither one would account for the impact on implied volatility today. The other candidates Iím referring two are the risk reversal and collar. The risk reversal involves a purchased and sold contract using both a call and put as a standalone directional position. The collar combines the risk reversal with an equal ratio of stock to form the synthetic equivalent of a vertical spread.
Back to our question of which might it be, in consideration of the other 85,000 plus contracts traded, that much larger quantity of combined paper could be responsible for the drop in premium. As that activity does dwarf the spread by 60,000 contracts, premiums could have easily been under attack regardless of what this trader may have established in the May strikes in question.
Figure 1: Expedia (EXPE) Short Strangle vs. Bull Risk Reversal
Further and opening up the debate to our other position candidates, when dealing with the likes of a collar or risk reversal; when the individual markets are just $0.05 wide and a size trader wants the fill, itís easy to appreciate a hit of both bids means much less than if both markets were say $0.25 wide. That should, I hope, be a lot more convincing for readers, in defining the position as an actual short strangle.
Of the two other possibilities, admittedly it appears the collar, if the stock wasnít legged, is a likely a non-contender. Attempts to sift through prints didnít turn up any blocks of shares around the time of the option order. However that doesnít preclude a risk reversal like the bullishly-designed one shown above from having traded, although we canít count out the other guyís interpretation of events either.
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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