It’s not too early to start thinking about Christmas
10/27/17
The candy from Halloween hasn’t been distributed yet, and the turkey for Thanksgiving isn’t anywhere near being roasted, but some traders are already keeping an eye an out for Christmas. Yesterday morning, using the “Unusual options volume” scanner on OptionsHouse by E*TRADE, Etsy (NASDAQ: ETSY) showed up in the number 3 slot for percentage difference, with over 12,000 options contracts changing hands.
Etsy (ETSY) unusual activity, 10/26/17

Source: OptionsHouse by E*TRADE

Etsy operates an online commerce platform to bring together buyers and sellers of various goods, often for crafts from boutiques, which can be popular items during the gift-giving season. Here’s what took place:

  • Traders bought 6,000 ETSY December 15 puts for $0.60.
  • And concurrently bought 6,000 ETSY December 17.50 calls for $0.60.
  • Taken together, the net position is long the Dec 15-17.50 strangle for $1.20 ($0.60 + $0.60).

By owning a strangle, they profit if ETSY stock rises or falls before the December expiration. The risk/reward options graph for this position looks like this:

Etsy (ETSY) strangle risk/reward, 10/26/17

Source: OptionsHouse by E*TRADE

The traders who bought this strangle have defined risk, meaning they can only lose the $1.20 that they paid for the spread. If ETSY were to continue to remain between $15 and $17.50 per share, their losses are limited. In order to profit from this position, ETSY stock would have to fall below $13.80 or rise above $18.70 by December expiration.
Etsy (ETSY) performance 10/24/17 - 10/26/17

Source: OptionsHouse by E*TRADE

ETSY stock was trading around $10 per share back in April. It has steadily climbed to the $16 range since then. With the stock currently trading around $16.30, the buyers of the strangle would need ETSY stock to rise or drop approximately 15% between now and December 15. That’s a rather big move in either direction.

The stock took a beating at the beginning of this week after Amazon announced it was getting into the craft-hawking game.1 In the past few days though it has clawed back a bit, and these traders clearly think more turbulence is on the way. Let’s not forget ETSY also reports earnings on November 6, more than a month before the options expire. 

Looking ahead, these traders are speculating that Santa is bringing lots of gifts, or lumps of coal, either of which could make ETSY move big in any direction.

 

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1. MarketWatch: Etsy shares clobbered by Amazon’s latest crafts-selling effort. 10/23/17.