Unusual Option Activity

With the recent price action in $AIG, the Property and Casualty Insurance Industry is in the process of being combed over for the next mover. I like to trade options so I decided to delve into the data to see what surfaced.

One name that stood out was Everest Re Group Ltd. ($RE) based out of Hamilton, Bermuda (wonder why). Specifically, I found the option activity on Friday to be of interest since a large number of calls went out. Makes sense since calls give the owner the right to buy a stock at a certain price and the sector RE is in has been on the rise.

I noticed that the largest volume occurred in the October $60 and $65 strikes with 1,200 and 1,800 contracts going out respectively This volume was also a 3-month record high in the call volume. The 10-day average volume is 151 contracts and RE had over 3200 on Friday with the bulk being these two strikes. This call activity also skewed the put/call ratio to a meager .07. In other words, there are .07 puts per call in the open interest.

RE Chain

Typically, such a low put/call ratio could be used as a contrarian indicator and a sign that there is too much optimism. However, one must consider the reasons for such activity and, more specifically, why those strikes. In it’s simplest form, looking at intrinsic v. extrinsic value and assuming the stock is at $84.50 for easy math, the $60 calls have $24.50 of intrinsic value while the $65 calls have $19.50 of extrinsic value. If you look at the bid/ask in the chain above you can see that the ask for both of these options is within the extrinsic value of the option. In other words, there is no extrinsic value (time and volatility) baked into the premium.

When you move that deep in-the-money with an option you reach parity where your delta is at 1.00. You are literally mimicking the stock for a fraction of the cost as the option increases in price as the stock increases in price…penny for penny. I also noticed that all of these options went out at 11:08 central time so it’s more than likely one “player” moving the chains (pun intended) here in RE.

What does all this mean? Hard to say but if I were bearish on RE I’d be selling front month options as the Theta erodes the value much faster. In addition, i’d sell at-the-money or out-of-the-money options as most of their premium is made up of time and volatility. We could also be looking at a buy-write where the seller of these options buys stock and then sells the calls against them. Once again, I’d be more inclined to do that with front-month options and besides that, I couldn’t see any stock activity at or near 11 am that would offset the sell of the calls.

If it is a speculator, they have a decent chance to make some profits if RE does break higher. Take a look at the chart below and it’s poised to break higher out of some near-term resistance. This is by no means an endorsement to back the truck up on RE or even go long at all. Rather, a take on some recent option activity on a stock in a hot sector of late.

RE Chart