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Guest Post – A New Record High on SE by Andrew Keene

TradingPub Admin | June 12, 2013

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Thanks to Andrew Keene of www.KeeneOnTheMarket.com for the following guest post.

SE – Record High

Shares of Spectra Energy (Ticker: SE) hit a record high in intraday trading today, June 12, shortly after markets opened.  The stock hit $33.96 and remains over $33.00 as of the time of writing, which represents a 10% gain day-to-day.  The Houston, Texas based company stores, distributes, gathers and processes natural gas, and is the operator of one of the largest pipeline systems in the US. SE has climbing steadily this year, and was up 11% YTD prior to today’s rally.

The ≈10% jump this morning was the result of an announcement made yesterday evening regarding the sale of U.S. assets to a partnership that it controls, Spectra Energy Partners (SEP), according to Bloomberg Businessweek. The proposed move would allow Spectra to lift annual dividends to 12 cents, up from the current level of 8 cents.  The company will face greater growth potential due to the cheaper cost of equity resulting from this exchange to such a degree as to suggest a post-deal stock valuation over $40 according to a presentation by Sandell Asset Management.

The company may also expand on these efforts, as Sandell has recently amasses a large stake and is urging the management at Spectra to take further, more robust action. The specifics of the deal will officially be reported with Q2 earnings in August.

Trade

The “Institutional Trade”:

On 5.30.2013 A trader bought 10,239 SE Sep 33 Calls for $.425
On 6.4.2013 A trader bought 3250 SE Sep 33 Calls for $.425
On 6.5.2013 A trader bought 3814 SE Sep 33 Calls for $.40
On 6.6.2013 A trader bought 5076 SE Sep 33 Calls for $.40
On 6.7.2013 A trader bought 2889 SE Sep 33 Calls for $.425

So, between 5.30.2013 and 6.7.2013 a trader bought over 25,000 SE Sep 33 Calls for $.425 on average.  Lets break it down a little more:

Risk: $42.50 per 1 lot
Reward: Unlimited
Breakeven: $33.425
Cash Outlay: $1,073,890 ish

Today, SE rallied to $33.60 and those Calls that were purchased are worth $1.80.

Total Profits by a Trader in SE: ($1.80 - $.425 * 25,268)= $3,474,350

Unusual Option Activity:

We define unusual option activity as large block trades that represent a large percentage of daily option volume. The block trade is considered “unusual” if the option volume is above the average daily volume over the past 22 days. At KeeneOnTheMarket.com we scan and analyze order flow from all of the major options exchanges in order to identify any unusual option activity.

Analyzing unusual order flow gives traders a window into what the positions that large institutional players have. The majority of unusual option activity can be traced back to hedge funds, mutual funds, and other large institutions. Knowing where these institutions are placing their bets can be hugely advantageous for any trader. These institutions have informational and technological advantages that the average trader doesn’t have, and the amount of time and analysis that goes into every one of their trades is substantial.  We offer this service through our 7 hour daily LIVE trading room http://bit.ly/135QWt8 or through Premium Twitter feed with all entries, exits, and unusual options activity tweeted all day long: http://bit.ly/11f0L9u.

Order flow can however at times be deceiving. One might logically thing that a large block buyer of calls is bullish on the underlying. This is not always the case. Remember that a large number of participants in the equity options market are hedgers. Long calls are a hedge against short stock, and long puts are a hedge against long stock. With this in mind we have developed a 7 step trading plan that helps filter out unusual option activity that will not provide actionable trade setups. It is by using this plan that we are able to identify the most significant unusual options activity trades every day.