Can someone explain this strategy?

[ATHiker]

Cal-Maine (CALM) has 110% of its float short (depending on the source it ranges from 97-110). The fundamentals of the company are pretty solid and as the short interest has gone up over the last year, so has the stock, thus the shorts are in trouble.

A log of games appear to be getting played out with this stock and its price swings. One particular play has me baffled...

Here's the yahoo 5 day chart:
CALM: Basic Chart for CAL-MAINE FOODS IN - Yahoo! Finance

You will notice on Monday April 28th between 3:35pm ad 3:40pm that 800,000 shares were traded all at once at $31.20. At the same time a straddle position was taken at the MAY 35 strike. 8000 May 35 Calls and 8000 May 35 Puts.

Can someone explain this strategy? I am wondering if a short hedge fund is using this strategy to cover? or limit losses? I am at a loss. Especially since the Puts were priced at +6.00 each and the Calls were at 0.56 each. The option positions were all opened so someone was buying and someone was selling. Due to this abnormally large trade compared to the historical trades of CALM I assume the market maker was part of this strategy.

Please help, professional shorts are working this stock hard and I am just trying to understand their tactics.

Thanks

Disclosure: I am currently long May 40 calls looking for a short squeeze that hasn't materialized since April earnings.

 

[A Dashing Blade]

Initial thought . . . doing the straddle at 35 strike with the stock @ 31.20 doesn't make much sense (the 30 straddle would) so I'd guess the synthetic future was opened ie long call/short put or short call/long put with the equity traded the opposite way. Suspect there's a dividend play involved somehow.

. . .

best guess, buy the stock, take the dividend, short synthetic on the option side. Possibly some tax treatment effect in there as well.

 

[grantx]

AT,

Were the stocks bought or sold? Was the straddle long or short?

Grant.

 

[ATHiker]

Thanks for the replies. I do not know if the stock was sold long or short, same for the straddle. How would you tell this?

There was a dividend here as well. 0.81 dividend. The ex-date was April 25th with April 28th being the day of record.

So maybe someone was already long the stock before ex-div, and then sold the 800,000 shares the next trading day.

Would the sale of 800,000 shares by a hedge fund cause a market maker to take out a straddle position? When those shares hit the tape the stock did not move...it took a few minutes until the stock started to move down again. In past trading 10K-20K spike in volume would yank the stock in one direction or another by .20-.50. So it is very suspect that 800,000 shares could have been traded almost instantly in such a small float stock (that is 100% short) and not move the tape.

Still trying to get a full grasp of this.

Thanks again

 

[anley]

I am wondering if a short hedge fund is using this strategy to cover?

It's always a hedge fund isn't it

 

[grantx]

AT,

This is a guess, but it could be "agency cross". The buy side is usually done at the ask, the sell at the bid, with the broker taking the spread (plus comm's).The position would not have gone through the market but I think it still needs to be recorded. This is the case for Eurex futures and also required in the pits of LIFFE.

However, given the size and value of the trade, the clients would be pretty significant and may refuse to pay the spread, insisting on a commensurate comm rate only. Still, not a bad return for the broker clicking a mouse two or three times.

How this would tie-in with the options, I would need to think.

Grant.

 

[luckyd1976]

Cal-Maine (CALM) has 110% of its float short (depending on the source it ranges from 97-110). The fundamentals of the company are pretty solid and as the short interest has gone up over the last year, so has the stock, thus the shorts are in trouble.

A log of games appear to be getting played out with this stock and its price swings. One particular play has me baffled...

Here's the yahoo 5 day chart:
CALM: Basic Chart for CAL-MAINE FOODS IN - Yahoo! Finance

You will notice on Monday April 28th between 3:35pm ad 3:40pm that 800,000 shares were traded all at once at $31.20. At the same time a straddle position was taken at the MAY 35 strike. 8000 May 35 Calls and 8000 May 35 Puts.

Can someone explain this strategy? I am wondering if a short hedge fund is using this strategy to cover? or limit losses? I am at a loss. Especially since the Puts were priced at +6.00 each and the Calls were at 0.56 each. The option positions were all opened so someone was buying and someone was selling. Due to this abnormally large trade compared to the historical trades of CALM I assume the market maker was part of this strategy.

Please help, professional shorts are working this stock hard and I am just trying to understand their tactics.

Thanks

Disclosure: I am currently long May 40 calls looking for a short squeeze that hasn't materialized since April earnings.

It's just a big money Collar (or Conversion) With Earnings Jul 28th the big money client wanted protection/mobility for the long holding period. Maybe even a One Month Conversion S-Stock, B-Call, S-Puts for income 4% return. They'll probably repeat close last day of May Exp and repeat in Jun for additional income.

 

[luckyd1976]

You will notice on Monday April 28th between 3:35pm ad 3:40pm that 800,000 shares were traded all at once at $31.20. At the same time a straddle position was taken at the MAY 35 strike. 8000 May 35 Calls and 8000 May 35 Puts.

Can someone explain this strategy? I am wondering if a short hedge fund is using this strategy to cover? or limit losses? I am at a loss. Especially since the Puts were priced at +6.00 each and the Calls were at 0.56 each.

Short 800,000 shares at $31.20 = $24,960,000
Buy 8,000 Calls at $0.56 = $448,000
Short 8,000 Puts at $6.00 = $4,800,000 (+18.8% return)

This is just being used as an income tool by the Hedge fund. He/She is exploiting the High IV of the puts at the time.

 

[ATHiker]

Thanks again for the replies.

Is it possible this was a person looking to double their position?
The agency transfer was used to move the shares into a trading account from maybe a restricted stock account (company insider?). They then sold the calls and sold the puts.

Selling the calls gets them out of the stock at 35 when they were long at 31.20
If the puts get exercised they are assigned another 800,000 shares at a cost basis of 30.20 (35 strike - 4.8 prem for the puts),so at the may expiration they could end up long 1.6 million shares at a cost basis of 30.70 [(31.20 + 30.20)/2]

I had the put price wrong above...it was 4.8 per contract not 6

 

[luckyd1976]

Is it possible this was a person looking to double their position? The agency transfer was used to move the shares into a trading account from maybe a restricted stock account (company insider?). They then sold the calls and sold the puts.

These type of Collars/Conversions happens all the time.

But IF THIS IS a gifted Restricted stock play, dont expect them to double down. Reminds me of Mark Cuban (Dallas Mavericks NBA Owner. When Yahoo purchased his Inet company they gave him a huge amount of Yahoo stock. He immediately placed the Collars on it to generate income. They wouldnt double down on free income. By hangin on to it monthly (buying the Options back well before Exercising) they hang on to their moneymaker.

Chances are (with the huge short interest) this is nothing more than a conversion to exploit the PUT price. S-Stock, B-Calls, S-Puts. And after May EXP they will probably buy insurance (Calls) and write out more Puts for income.

Selling the calls gets them out of the stock at 35 when they were long at 31.20 If the puts get exercised they are assigned another 800,000 shares at a cost basis of 30.20 (35 strike - 4.8 prem for the puts),so at the may expiration they could end up long 1.6 million shares at a cost basis of 30.70 [(31.20 + 30.20)/2]
I had the put price wrong above...it was 4.8 per contract not 6

Ok a +15% return for less than one month of holding instead of +18.8%

It's just being used as a trading tool.
I'm assuming S-Stock, B-Call, S-Put.

In this case Calls are the Protection. If the puts get exercised, this trader will place their stock to the exercier. They will no longer own any stock if their Puts get exercised.

IMHO
This isnt a doubledown. Its just a reverse collar.

 

[luckyd1976]

Collars & Conversions

These truly are the tools for big money traders. They offer protection, Mobility, and use margin very safely as well. Let's talk about the CALM scenerio for a minute because this is truly a great play. lol, Wish I knew which HedgeFund it was.

CALM Case study
Stock =$31.20 (800,000 Shares)
35 Calls =$0.56 (8,000 Contracts)
35 Puts =$4.80 (8,000 Contracts)

Bit of the basics, Collars (B-Stock, B-Puts, S-Calls) Are just more advanced CoveredCalls w/protection. These are used for safety and directional bias upward/Nuetral for the income. Conversions (S-Stock, B-Calls, S-Puts) are just the opposite.

The beauty of both of these strategies for the big money players is the Margin on the stock ownership. Couple that with the safety (protection) and you've got some big money explosive trades.

Example: Conversion Non-Margin
S-Stock =$31.20 (800,000 Shares) =$24,960,000
B-35 Calls =$0.56 (8,000 Contracts) =$448,000
S-35 Puts =$4.80 (8,000 Contracts) =$3,840,000 (+15.1% return)

But when you factor in Margin 50% Initial and 40% Maintence Margin
S-Stock =$31.20 (800,000 Shares) =$12,480,000
B-35 Calls =$0.56 (8,000 Contracts) =$448,000
S-35 Puts =$4.80 (8,000 Contracts) =$3,840,000 (+29.7% return)

29.7% not a bad trade for 14days worth of holding. And if the IV is still high after May EXP they'll do another B-Call, S-Put for probably another 10-20% return. This stock wont see their earnings (JUL28th) report blow up this trade anytime soon, either, so this was a great trade.

 

[ATHiker]

Lucky,

thanks for taking the time to explain this. Very good information. If you look at the options there are already straddles setup for May and Jun at 8000+ contracts. Aug and Nov seem to show signs of a straddle at 35 as well.

If this is a short position then they would cover their short position when the owners of the puts exercise if the stock is under 35? Do you think they are looking to cover or is this a play were we could see the stock pushed up above 35 by expiration?

This stock looks to be manipulated pretty badly, up and down. It makes some big move with no news and the underlying egg market is still preforming well fundamentally speaking.

 

[luckyd1976]

Lucky,

thanks for taking the time to explain this. Very good information. If you look at the options there are already straddles setup for May and Jun at 8000+ contracts. Aug and Nov seem to show signs of a straddle at 35 as well.

If this is a short position then they would cover their short position when the owners of the puts exercise if the stock is under 35? Do you think they are looking to cover or is this a play were we could see the stock pushed up above 35 by expiration?

This stock looks to be manipulated pretty badly, up and down. It makes some big move with no news and the underlying egg market is still preforming well fundamentally speaking.

You're right about the volitility here. And with all this option activity I HAVE NO IDEA whats going on. Earnings arent til Jul28th.

High option volumes are multiple people playing multiple angles on the same stock. There's no way to tell exactly who's doing what strategy. You could have just bought 2,000 35 calls and at the very same moment I bought 2,000 35 puts.

But if we assume that before mentioned case scenerio...

If their stock is below 35, the May 35 Puts MAY get exercised. They would then have to produce the stock to either the market maker (only if the market maker feels its worth it) and or to anyone else that wants the stock exercised at the $35 level.

The straddles here TO ME dont make sense (B-35 Calls,B-35 Puts) it's out way to early for earnings. And frankly thats probably just people seeing the Volitility and speculating that a something big is coming.

If someone is trading Big Money Collars/Conversion...
1 They want it exercised away
OR
2 They want to keep the stock for another month of income. So they would have to buy back whatever contracts are left on their 35 Puts before EXP.

 

[ATHiker]

It looks like the conversion holder has covered about 5000 of the 8000 contracts in two trades today. 2000 and 3000 blocks. It appears they closed both the short puts and the long calls for profit on both.

There was also some heavy volume that appeared to be a straddle at the Jun 50 and Aug 40's.

The stock made a nice run today. I suspect this fund will let a few of the short shares get covered but I really don't know.

The calm message board at yahoo finance has posts from people saying their brokers are asking if they will allow their shares to be loaned for shorting. The short % is still 90+%

 

[luckyd1976]

It looks like the conversion holder has covered about 5000 of the 8000 contracts in two trades today. 2000 and 3000 blocks. It appears they closed both the short puts and the long calls for profit on both.

There was also some heavy volume that appeared to be a straddle at the Jun 50 and Aug 40's.

The stock made a nice run today. I suspect this fund will let a few of the short shares get covered but I really don't know.

The calm message board at yahoo finance has posts from people saying their brokers are asking if they will allow their shares to be loaned for shorting. The short % is still 90+%

Yeah with the $35. breakout I expected them to cover. If they are hangin on to any S-Stocks, they are eyeing the JUN PUTs for more income. Thats only if they hang on to some S-Stock...

$40 looks like a big R level so watch the 40 JUN Calls/35 JUN Puts volumes for a continuation of this trade.