Bullish Trends: Rolling, Rolling, Rolling

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It's been a quiet week of trading so far, with the S&P 500 gaining just 0.15 points Monday, about 4 points yesterday, and indicated a few points higher early-Wednesday. Options volumes have been relatively light with 14.5 million contracts traded yesterday, which is a bit below the 15.4 million daily average of the past month. Yet with the November expiration a few days away we will likely see an increase in volume, driven by rolling activity.

A roll is simply an adjustment in which the investor is closing out one position and opening another in a different options contract. A roll can be up or down strike prices or to a different expiration month. Near expiration, positions are often rolled to salvage time value of an out-of-the-money or to avoid exercise/assignment on an in-the-money contract. The investor covers a position in the expiring contract and opens a new one in a later month. Let's take a look at a few examples that have already surfaced this week.

iShares China Fund (FXI) was trading around $36.50 Monday and a November 37 - December 38 call spread was bought on the exchange-traded fund for $0.25, 61400X. The investor sold November, bought December, and probably rolled a position out one month and up one strike price. Buyers of November 37 calls on FXI were active last month, including a rather substantial block for $0.35 on October 10. The trade seemed to be working out well until elections in the US and China took the wind out of China's equity markets. FXI suffered a three day 4% slide. Now, by rolling to massive block of December 38 calls, for $0.48 per contract, the investor seems to express confidence that the rally in China's equity markets will resume. There's now 103K in open interest at that line, which is the largest block of OI in the product.

Marathon Oil (MRO) was trading for about $30.40 Monday when a November 30 - December 29 put spread trades on the stock at $0.30, 41500X. The investor bought November, sold December, and probably rolled a position opened on 10/17 when November 30 puts traded at $0.49 per contract. Shares are holding above near $30, and the investor is covering the at-the-money puts for $0.26, while opening a new position in the December 29 puts at $0.56 per contract. If so, the put write in the December term seems to express confidence in the oil refiner.

Finally, Research In Motion (RIMM) is around $8.40 and interesting trading activity surfaced on the Blackberry-maker yesterday when a November - December 7 call spread traded for $0.34, 18300X, and again for $0.24, 14500X (roughly). 40,164 November 7 calls traded on the stock yesterday and the activity probably offset positions opened before the October expiration, when blocks traded for prices ranging from $1.15 to $1.20. The stock is up almost 5% since that time and the position is being closed at $1.43. They are closing the position rather than exercising the in-the-money contract and buying (calling) a hefty amount of RIMM shares at expiration. New positions now being opened in December 7 calls for $1.67., which traded 35,228 contracts on the day. With 43,326 contracts in open interest, the December 7 call is now the largest open interest position in RIM options.

If you track order flow to find trading ideas, the rolling of large blocks of options is interesting. In two of the three examples (MRO and RIMM), the investor is banking a profit on the November contracts. The FXI November call position was a winner until the volatile sell-off across global equity markets seen last week. Moreover, by opening positions in December, these big traders seem to be expressing confidence that the bullish trends in the underlying shares will continue over the next five and a half weeks.

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At the time of publication, Henry Schwartz held no positions in the stocks or issues mentioned.