Bulls keep swarming to tech: Options recap

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Technology stocks are usually popular with options traders. That was even truer than usual yesterday.

Netflix (NFLX) led the charge as it shot to new highs. The owner of programs like “Stranger Things” and “The Crown” added 7.4 million subscribers in the first quarter, which is pretty much like annexing the entire Dallas-Forth Worth metropolitan area. Profit beat estimates, its forecast surprised to the upside and analysts from Wall Street to Silicon Valley raised price targets.

It was also a big day in the options market, with over 519,000 contracts changing hands by the mid-afternoon. The last time it saw this kind of volume was on the heels of another report, three quarters ago on July 18. It was also the busiest equity in the market, eclipsing other big names like Apple (AAPL) and Facebook (FB).

A single large strategy emerged from NFLX’s tape over the morning. It was bold, confident and extremely bullish: Writing puts to finance long calls.

The trader began by selling 10,000 May 330 puts for $12.96 and buying an equal number of May 330 calls for $15.46. They persisted in the transaction in several more large blocks, driving up the size about 26,000 contracts on each side.

The resulting position is highly leveraged and simulates owning 2.6 million shares in the streaming-media company. Doing that with common equity would cost $861 million, while the options transaction cost less than $10 million.

It still has plenty of risk because they’re short puts. They accepted income in the present and pledged to buy NFLX if it goes under $330 by expiration. So far it’s working in their favor because the stock closed up almost 10 percent to $336.06. The trader used the money to cover most of the cost of the calls, which tend to make money when shares rally. See our Knowledge Center for more.

Netflix (NFLX) chart with options volume
Netflix (NFLX) chart with daily options volumes

EBay (EBAY) was the target of another big transaction in Tech. This time, an existing bullish position in the 10,000 April 30 calls expiring this week was unwound for $10.30. The investor then bought a matching number of October 36s for $6.10. They recovered $4.20 of their capital and gained an additional six months of long exposure to a company in the midst of a major turnaround. Remember EBAY exploded higher on February 1 on a strong earnings report and plans to ditch PayPal (PYPL). KeyBanc also upgraded the stock last week amid optimism about its next earnings report on April 25.

EBAY ended the session up 1.05 percent to $40.612. Total options volume was twice the daily average, with calls accounting for more than two-thirds of the activity.

This post is for education purposes only and should not be interpreted as a trade recommendation. Options trading may not be suitable for all investors.

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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.