Huge, mysterious bet has traders buzzing
Someone is risking $1.5 million on the hope that shares of Southwestern Energy will rise nearly 15% in the next 4 months. The company reports earnings next week.
In a massive, unusual options bet, one institutional player is making a wager that Southwestern Energy (SWN) will have an especially energetic run between now and June.
On Thursday, one options trader bought 15,000 June 47-strike calls for about $1 each. This trade won't make money unless Southwestern rises above $48 by the middle of June, which is some 15 percent above current levels.
If the stock closes below $47 at June expiration, the entire $1.5 million spent on the trade will be lost.
Southwestern Energy, a natural gas and oil exploration company, is set to report earnings on Thursday, Feb. 27 after the bell. Mike Khouw of Dash Financial says the trade is likely a bet on that earnings report.
"I look at a trade like that -- it's big, it's an institutional bet, there is a catalyst and it's unusual -- it sticks out," Khouw said. "If I ever was going to just tag along with an options trade, this might be the one I'd decide to tag along with."
Khouw says the blowout size of the trade indicates that the trader has, or believes they have, some knowledge about what the company will report next week. The June 47-strike calls previously only had 150 contracts of open interest, meaning that this one trade increased the open interest in the contract a hundredfold.
"Whoever did this is expecting something that we aren't really seeing in the cards leading up to next week," Khouw said. "If we just sit there and follow the dots from one quarter to the next, I don't think it's telling us where the stock's going to go. But this options trade suggests that somebody has other ideas."
One possibility is that this trader is expecting the company to report some exciting news regarding the Lower Smackover Brown Dense oil formation in southern Arkansas and northern Louisiana.
"There is not a lot of credit for that play baked into people's estimates," partially due to the fact that it's an oil play and Southwestern Energy is generally thought of as a natural gas company, Sterne Agee analyst Tim Rezvan told CNBC.com. If it works out, "we think you could see 4,000 to 5,000 barrels [per day], and that's not really reflected in the Street estimates."
Rezvan, who expects Southwestern Energy to report news related to Brown Dense with its upcoming earnings, predicts that "shares would sharply outperform on any news related to that play."
Yet even Rezvan only has a $48 price target on the stock. If the stock rises to $48 by June, this trade would still merely break even.
In fact, out of 27 target prices on the stock compiled by FactSet, only two are above $48, and the mean target is $42.70, which is roughly in line with where the stock is trading.
The bottom line? This options trader is expecting to hear some very good news soon -- and is putting serious cash behind that conviction.
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"This trade won't make money unless Southwestern rises above $48 by the middle of June."
Wrong. The call option price moves with the underlying price in the market as the time premium slowly decays. SWN was up 1.25% today, and the call options the investor bought for $1 yesterday traded retail today at $1.27. Not a bad return for one day if they turned around and liquidated any of the options.
It’s fair to say the trade is unusual and that there is very low liquidity for its relative size. But, for all anyone knows the buyer shorted the stock yesterday and bought the call options to limit their downside loss on their bet. It could be they’re expecting some really bad news on SWN.
Inside information? Or... someone gambling 1.5 mill that they can move the stock as a whole by making people think they have inside info?
I don't play with futures, so explain it to me if I'm wrong, but I thought CALLS gave you the OPTION to buy or not buy at the option price and if you don't exercise it you're only out the cost, in this case $15,000, of the contract.
The article says "If the stock rises to $48 by June, this trade would still merely break even." In other words, ($48 - $47) x 15,000 = $15,000 and pays for the $15,000 worth of calls.
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