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I'm seeing a large call option transaction in


(GLW) - Get Report

, in which the $20 and $30 calls with the in the January 2008 expiration each traded 20,000 contracts. The trade was done as a spread in a block transaction in which someone bought the $20 calls and sold the $30 strike for a $3.50 net debit for the spread. This would appear to be someone establishing a very bullish position.

Readers often ask what criteria to use to determine the nature of reported option volume -- rightly pointing out that for every buyer there must be a seller -- or what identifies a trade as a spread or multi-strike transaction. Granted, unless you are the person executing the trade, it's hard to know for sure; you can only make an educated guess based on certain assumptions. I discuss some of the clues to use reading option action recently

on video.

Start checking a transaction by looking at prior open interest. Pay attention to time and sales to see when things transpired, the contract size and at what price the volume occurred. If there was little prior open interest and most of the volume occurred at the offer price in one large block trade, the transaction was probably an opening purchase, that is, someone initiating a new position. The people taking the other side or selling the options most likely are market makers who are simply facilitating the transaction, and usually they hedge immediately with the underlying stock.

In the


(GLW) - Get Report

example above, if someone was indeed buying the call $20/$30 spread 20,000 times, that would equate to a net delta equivalent of being long approximately 900,000 shares. That means the market makers need to buy about 900,000 shares to have a delta-neutral hedge.

Today's volume in Corning is just more than 11 million shares, which actually are running slightly below the 15-million-share daily average volume. Of course, some of the hedging might occur through the purchase of other call options or through the sale of puts, but you see how a large call option purchase creates buying pressure on the stock.

As far as identifying this as a spread, again, checking the time and sales reveals that the volume in both strikes occurred at the same time and as single 20,000-contract trade.

On a related note,


CyberTrader platform will soon offer a feature that identifies trades as spread transactions. That will be a great tool because it will save the time of checking time and sales.

It also will clear up the confusion and aggravation when it appears that a trade has "printed" though your order. That is, spread transactions are executed at a net value, but may use prices from the individual strikes that are above or below the best bid or offer in one of the strikes. By identifying the volume as a spread, retail traders will have a clearer picture of why one of their single-strike orders was not filled, despite what appears to be massive volume at their price limit.

Steven Smith writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback;

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