Trading a high volume, big percentage move sans news...
It's a little unsettling to see one of your stocks surge higher, on strong volume, absent any headlines. This is especially true if the uptick comes during a general market sell-off.
What do others know that you don’t? Is the spike a suckers’ rally to be sold or is it a harbinger of a much bigger advance? Why are normally sleepy call options trading actively on out-of-the-money strikes?
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The March 13 gap-down opening on Calamos Asset Management (CLMS) was due to a brokerage firm’s downgrade. Clients who sold into that advice got the worst prices of the past two weeks. The shares rebounded 4% - 5% within a couple of days then marked time until March 25.
On Monday CLMS opened quietly then took off on high volume, rising 7.44% from $11.41 to $12.26 in just minutes. The shares then sold off slightly, rebounded to near the high then tapered off to close at $12.03. Trading totaled about three times normal. At 4 PM EST the DJIA was down 0.43%. CLMS had gained 5.25%.
There were no headlines on Calamos and no rumors. CLMS call options, which rarely trade at all, were changing hands for the April, May, June, August and November expiration months. 1570 contracts moved on the August $12.50 strikes and 41 of the November $15 strikes were bought.
August $12.50’s went as high as $0.85 per share. The November $15’s touched $0.37 /share. Those are significant numbers considering the 52-week range for CLMS has been $9.24 - $13.35.
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I couldn't find any information on why CLMS and options were moving so strongly. I own a large position. What did I do? When the shares were at $12.08, I sold August $12.50 covered calls for $0.75 /share on about 22% of my position. This commits me to selling for a net $13.25 per share ($0.75 plus $12.50) if CLMS is above $12.50 on expiration date. It also provides me with a 6.2% downside cushion from today’s elevated quote if the stock cools off again or simply remains around current levels.
What went into my decision? If I could have sold at $13.25 today I would have been satisfied to let some shares go. Why not get paid a couple of grand upfront on part of my holdings? If CLMS continues higher I’ll be happy for my other 78%. I won’t have missed anything on the covered 22% until it passes $13.25.
Will I regret today’s move later? Perhaps. Taking a partial hedge seemed like the best I could do without additional knowledge of why CLMS was on the move.
In real world of investing, we face uncertainty every day. There are worse fates than capping part of a position at what would be a significant gain. Time will tell if I made a bonehead move by writing calls or simply by not selling into strength. If I hadn’t been paying attention intra-day, I wouldn’t have even seen the opportunity.
Disclosure: Long CLMS shares, short CLMS calls.