Options Activity Alert: KCG, CDZI, DRIV

KCG – Knight Capital Group, Inc. – Options activity on Knight Capital Group spiked this morning after the brokerage firm and market maker was linked to unusual trades at the open on NYSE that sparked extreme price volatility in some stocks and triggered circuit breakers that halted trading in several others. Investor concern over the firm’s ties to the trades was quickly reflected in the price of Knight’s shares, which fell more than 25% to $7.60 in the first half of the session. Options volume is currently more than three times the size of overall open interest of 10,969 contracts on the stock, with most of the action in puts as evidenced by the put-to-call ratio of 4.5. Traders scrambled to get long downside puts as the stock spiraled lower this morning, with notable fresh interest building across all available expirations. Front month put volume is heaviest with upwards of 7,000 lots changing hands at each of the Aug. $7.5 and $10 strike prices. Early birds snapping up more than 4,000 of the Aug. $10 strike put this morning at an average premium of $0.68 apiece saw the value of their contracts increase three-fold intraday as premium on the contracts soared to a high of $2.50 prior to midday in New York. Trading traffic in the $7.5 strike puts set to expire in September, October and January ’13 is also noteworthy today as investors await further details and clarity on the morning’s volatility.

CDZI – Cadiz, Inc. – The more than 50% rally in shares of land and water resource management company, Cadiz, Inc., to a near 52-week high of $11.00 today appears to have caught a number of call sellers off guard. Recent selling in front month calls suggests some options traders were not anticipating the pop in Cadiz shares sparked by positive news regarding a project to provide a reliable water supply to 100,000 homes in Southern California, details of which may be found in a press release issued by the company today. Some positions, including the sale of around 60 calls at the Aug. $7.5 strike for an average premium of $0.28 apiece back on July 19th and the sale of 40 calls at the Aug. $10 strike for a premium of $0.10 each on July 26th, have moved against traders. The call sellers would need to shell out around $3.80 in premium per contract to buy back calls at the Aug. $7.5 strike this afternoon and roughly $1.70 apiece to close out short positions in the Aug. $10 strike call. Call open interest in Cadiz is greatest at the Nov. $10 strike, where 400 contracts constitute the total number of previously opened positions. A review of time and sales data suggests 100 of those calls were sold for $0.30 apiece on July 18th, while another 150 calls sold for an average premium of $0.40 each at the end of June. Buying back the calls today is a pricey proposition, with premium required to buy the Nov. $10 strike up at $2.55 apiece in early-afternoon trade.

DRIV – Digital River, Inc. – Shares in Digital River sold off hard Wednesday after the company posted lower-than-expected second-quarter revenue and said the weakness in sales is likely to continue during the second half of the year. The stock is currently down 26% at $13.15, the lowest shares have been since 2003. Put buying on the provider of e-commerce services and solutions for software and consumer electronics companies suggests one or more traders are positioning for the price of the underlying to extend losses in the near term. Volume in Digital River options is heaviest at the Aug. $14 strike where 760 puts changed hands against zero open positions. It looks like most of the put options were purchased for an average premium of $0.75 apiece. Put buyers stand ready to profit in the event DRIV’s shares settle below the average breakeven price of $13.75 at expiration. Intraday deterioration in the share price now sees the bid/ask spread on the Aug. $14 strike put up substantially on the day at $0.95/$1.10 as of 12:10 p.m. ET.

About Caitlin Duffy 373 Articles

Affiliation: Interactive Brokers

Caitlin Duffy joined Interactive Brokers in 2009. In her role as Equity Options Analyst, Caitlin provides daily market commentary; highlighting various options trades, trading patterns and strategies of interest. Through Interactive Broker's webinar program, Ms. Duffy presents a number of educational, options-related events describing the theoretical pricing of options, the option Greeks as well as options strategies.

Interactive Brokers: Interactive Brokers offers direct market access to around 80 electronic global markets from a single account. Successful traders and investors understand that superior technology and lower trading costs can result in greater returns. For 32 years we have been building direct access trading technology that delivers real advantages to professionals worldwide. With consolidated equity capital of US $4.4 billion, IB and its affiliates exceed 1,000,000 trades per day. In addition, our prudent and conservative risk policies make Interactive Brokers a safe haven for your money. Discover some of the reasons why IB, the largest independent US broker/dealer, is the professional traders' and investors' choice.

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