Large trader making volatility play?

  • Unusually large options positions in BOKF
  • Matching January calls and puts point to possible straddle
  • Stock consolidated after rallying 54% off July low

Bank stock BOK Financial (BOKF) has sat atop the LiveAction scan for unusual open interest (OI) for roughly a week, with its total options positions roughly 70 times average. A couple of 10,500–contract positions (which hit the tape on December 1) accounted for all but a handful of the stock’s OI:

Chart 1: BOK Financial (BOKF) January option, 12/7/22. BOK Financial (BOKF) options chain. Large straddle in $105 options?

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

It’s not the only possibility, but equal-sized positions in calls and puts with the same strike price and expiration date could mean a trader established a large “straddle” position— an options spread with the potential to profit regardless of whether the stock rallies or declines.

While a straddle may be neutral about the direction the stock moves, it’s definitely not neutral about how much it must move—i.e., its volatility. As the top of the following chart shows, a long straddle is a “long–volatility” trade. To just break even, a trader who uses a long straddle (buys the matching call and put options) needs the stock to move enough, up or down, to offset the combined cost of the options:

Chart 2: Long (top) and short (bottom) straddle profiles. Options straddle risk-reward profile. Long volatility and short volatility.

Source (data): Power E*TRADE. (For illustrative purposes. Not a recommendation.)

As the bottom of the chart shows, a trader who shorts a straddle (sells the matching options) is “shorting” volatility—the less the stock moves, the greater the potential profit. If the stock keeps climbing or falling, the straddle’s losses will continue to mount.

There are two sides to every trade, and we have no way of knowing whether a buyer or seller initiated the BOKF options positions. But if it is a straddle, it’s a substantial one. The combined cost of the January $105 call and put (using the options’ closing prices on December 1) was around 9.13 ($913), or a total of $9,586,500 for a 10,500–contract position.

That means a large trader who bought the straddle would have paid nearly $10 million for a position that would be profitable at expiration only if BOKF was above $114.13 (the straddle’s strike price plus the cost of the options) or below $95.87 (the strike price minus the cost of the options). The stock has mostly consolidated since rallying 54% from its July low to its October high:

Chart 3: BOK Financial (BOKF), 7/13/22–12/7/22. BOK Financial (BOKF) price chart. Straddle profit/loss boundaries.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

In contrast, a trader who shorted the straddle would immediately collect the nearly $10 million in premium, and would realize a profit at expiration only if the BOKF was trading between the two breakeven levels, with the maximum profit occurring if the stock was exactly at the strike price, in which case both options would expire worthless.

In other words, if the straddle hypothesis is correct, a large trader may be long or short BOKF’s volatility, rather than its stock price.

Market Mover Update: After a fourth day of brisk selling, January WTI crude oil futures (CLF3) traded below $72 and closed at their lowest level since January 10. Agiliti (AGTI) and SJW Group (SJW) pulled back for a second day after Monday’s jump on news of their addition to the S&P 600 index (see “Small caps, big moves”).

Today’s numbers include (all times ET): Weekly Jobless Claims (8:30 a.m.), Quarterly Services Survey (10 a.m.), EIA Natural Gas Report (10:30 a.m.).

Today’s earnings include: Lululemon (LULU), Broadcom (AVGO), Costco (COST), Chewy (CHWY), Ciena (CIEN).


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