Navigating the world of options can be a complex endeavor, filled with unique terminology and strategies that often bewilder retail investors. While purchasing fractional shares of familiar companies like Starbucks (NASDAQ:SBUX) might seem straightforward, delving into options trading requires a different level of sophistication. This disparity is a key reason why many retail investors face substantial losses within the options markets.
In my pursuit of a topic for this week’s Friday commentary, I came across an intriguing situation involving Las Vegas Sands (NYSE:LVS), a company generating significant interest due to its standout option activity. However, it’s important to note that the appearance of unusual options activity doesn’t necessarily translate into a straightforward buying opportunity. Here’s the rationale behind this cautionary approach.
Understanding the Unusual Activity
At the forefront of this situation is the December 12 $50 call option, which has emerged as the top choice in Friday’s trading. Notably, its volume-to-open interest ratio stands at a remarkable 355.45x. With a volume of 46,564 and an open interest of 131, this option holds an asking price of $8.65. Essentially, for this investment to be advantageous, the stock would need to rise to $58.50 by December 12, a move of around 4.3% from its current trading price of $56.11.
While this might appear to present a reasonable risk/reward proposition, there’s more to consider than meets the eye.
Analyzing the Trade Landscape
A closer examination of the trade that spurred the surge in volume for the December 15 $50 strike option reveals an intriguing insight. According to data from Barchart.com, a significant trade occurred at 10:27 on Friday, involving 46,000 call contracts for the December 15 $50 strike option. Interestingly, this trade constitutes an overwhelming 98.8% of the day’s total volume.
Initially, the notion of a major investor entering the scene might be enticing. However, a closer look at the trade conditions unveils the use of a term called SLAN, which stands for Single-Leg Auction Non-ISO. The concept of SLAN might be perplexing at first glance, but it essentially refers to the execution of an electronic order subjected to a two-sided auction mechanism that involves an exposure period. In simpler terms, it’s a specialized trading condition that doesn’t adhere to the standard options contract structure.
The Unique Nature of Non-Standard Options
Non-standard options are essentially options that deviate from the conventional terms of an options contract, particularly in regard to the underlying asset, which typically involves 100 shares. These non-standard options often come into existence due to specific events such as mergers, acquisitions, spin-offs, extraordinary dividends, or stock splits. An example provided is Bank of America’s (BAC) acquisition of Merrill Lynch, which exemplifies the distinct characteristics of non-standard options.
Returning to the December 12 $50 Call
A historical analysis of the price movements of the December 12 $50 call unveils intriguing patterns. Notably, this call saw limited trading activity, with only 15 contracts traded on July 21 and 17 on the preceding day. A more substantial volume occurred on June 16, and within the period from April 20 to the present, there have been only three days with volume exceeding 20 contracts: June 8 (25), June 13 (65), and August 11 (46,571).
The Volume Disparity Puzzle
The irregularity in volume distribution raises questions. Particularly notable is the trade for 36,664 calls for the September 15 $45 strike, a transaction that piqued curiosity. Despite a thorough search, there is minimal news explaining these large trades. One plausible explanation is that a trader was rolling their position on LVS, aiming to capitalize on further stock upside.
LVS: A Stock on the Move
Although Las Vegas Sands (NYSE:LVS) has recorded a 14% year-to-date increase, trailing behind the S&P 500, its robust year-long growth of nearly 50%, outperforming the index by a significant margin, indicates momentum. Analysts share this positive outlook, as evidenced by the Strong Buy rating (4.55 out of 5) awarded by the 11 analysts covering the stock. The mean target price of $70.90, well above its current value, further supports this optimism.
Unveiling Investor Interest
As Friday unfolded, it became evident that investors were taking notice of the substantial trades. By 1:26 PM ET, the volume reached 116,264, surpassing the 30-day average volume by a factor of five. Even when excluding the 46,000-trade anomaly, the volume still stood three times higher than the norm.
Intriguing Times Ahead
The situation surrounding Las Vegas Sands (NYSE:LVS) and its unusual options activity has undoubtedly set the stage for an intriguing narrative in the world of trading.
Featured Image: Freepik @ kaedeezign
