It’s no secret that options are often the investment vehicle of choice for “smart money” traders. Big funds and trading firms regularly use options to establish their biggest positions – sometimes in conjunction with stock holdings, other times just using options. It’s especially true for the most heavily traded ETFs and stocks.
Less often, you’ll see big money trades occur in low-activity options chains. Stocks that don’t have very active options chains tend to have wider bid/ask spreads and aren’t nearly as liquid as the active options products.
If you scan the biggest options trades from any given day, you’ll see a lot of familiar names. There will be the heaviest traded index ETFs and volatility ETFs. There are also usually some of the big tech names near the top. It’s relatively rare to see a name on the list that’s unrecognizable by most investors.
However, that’s exactly what happened to me just the other day. I came across a ticker that I’m not sure I’ve ever seen on an options screener before. The name of the company is Blackhawk Network Holdings (NASDAQ: HAWK) and the company provides prepaid products and payments services such as prepaid gift and telecom cards.
I admit, I had to look up HAWK to see what the company does. Moreover, it trades all of 300 option contracts a day on average. In other words, when there’s a big options trade, it’s easy to notice.
So here’s the deal…
Someone made a massive trade in HAWK – and I mean massive, especially when compared to average volume. This trader bought 10,000 February 35 calls while selling 20,000 40 calls in the same expiration. This type of trade is called a ratio spread and it helps reduce the cost of the trade.
In this case, the trader paid around $0.50 total. That makes the breakeven point $35.50 at expiration in February, with max gain at $40. Even with the double-short call at the 40 strike, the trader still dropped about $500,000 on the trade. But, max gain is in the neighborhood of $4.5 million.
At the time of the trade, the stock was sitting at $34. After the trade hit the wire, HAWK shot up 7% on the day. It’s almost certainly due to the trade, which is a lot of money to spend in such a low volume options name. It’s also obviously a very bullish trade on the stock.
There’s nothing wrong with replicating a trade like this in your own portfolio, as someone with a ton of capital clearly believes the stock is going up. However, you probably want to avoid doing a ratio spread since it opens up your risk considerably to the upside.
Instead, I’d recommend paying a bit more and doing a simple call spread. The 35-40 February call spread costs about $1.75 with the stock at $35.65. That’s not too steep a price to pay since the spread is already in the money. You can still make $3.25 on the trade, which is definitely a reasonable haul in this situation.