Large trader playing the range?
- CE options open interest more than 10 times avg.
- Key positions highlight possible large strangle trade
- Stock consolidating after big November sell-off
Celanese’s (CE) post-earnings sell-off, which reached -41.5% by November 19, probably had plenty of investors debating whether or not the chemical company’s shares had reached an attractive buying point. The move dropped the stock to its lowest level since May 2020 and widened the loss from its March highs to 58%.
Since then, though, the stock has likely disappointed both bulls and bears, with prices locked in a consolidation, trading mostly between $70-$75:
Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)
However, this “quiet” trading period was accompanied by some noteworthy options activity—and it may suggest a large trader was thinking about the stock in a different way than the average investor.
As of Tuesday, CE had one of the market’s highest levels of relative options open interest (OI)—at 74,548, more than 10 times average:
Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)
As it turns out, that options activity had a direct connection to November 19. That’s when two positions in excess of 21,000 contracts were established in both the January $75 calls and $70 puts:
Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)
Coincidence or not, the two strike prices turned out to be the approximate boundaries of CE’s recent consolidation. While the positions could be unrelated, a higher-strike call option and lower-strike put option with the same expiration could mean a trader executed a large “strangle” trade.
In this case, if a large trader executed a long strangle—that is, bought the January $70 puts and the $75 calls—the position could profit if CE moved up or down. The catch is that it would have to move enough to offset the combined cost of the options, which in this case was around 6.65 ($665) on November 19. That means a long strangle trader would have had to pay $13,965,000 for a 21,000-contract position. The dashed lines on the CE price chart show the strangle’s breakeven points at expiration—$81.65 (the upper strike price plus the cost of the options) and $63.35 (the lower strike price minus the cost of the options).
If the trader held those contracts until expiration and CE closed between the two strike prices, both would expire worthless and the trader would lose the entire $13,965,000. But that would be exactly what our large trader would want to occur if he or she had instead sold a 21,000-contract January $70-$75 strangle—that is, shorted both options—and collected the nearly $14 million in total option premium. And the short trader would have a chance for some profit (at expiration) as long as the stock was between the two breakeven levels.
As of Tuesday afternoon, CE’s consolidation had favored the short strangle: The position was trading around 5.48 (3.10 for the $75 call plus 2.38 for the $70 put). That means the strangle’s value had declined 1.17 since November 10—a $2,457,000 profit on 21,000 contracts.
Today’s numbers include (all times ET): mortgage applications (7 a.m.), ADP Private Employment Report (8:15 a.m.), S&P Global Services PMI (9:45 a.m.), factory orders (10 a.m.), ISM Services Index (10 a.m.), EIA Petroleum Status Report (10:30 a.m.), Fed Chairman Jerome Powell speaks at the New York Times DealBook Summit (1:45 p.m.), Beige Book (2 p.m.).
Today’s earnings include: Cracker Barrel (CBRL), Chewy (CHWY), The Campbell's Company (CPB), Dollar Tree (DLTR), Foot Locker (FL), Thor Industries (THO), AeroVironment (AVAV), Five Below (FIVE), PVH (PVH).
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