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DIRECTV Swarmed by Option Traders on Merger Speculation


DTV April 55 put most popular bearish trade.

After renewed speculation arose that a merger between satellite video provider DIRECTV (NASDAQ:DTV) and competitor DISH Network Corp. (NASDAQ:DISH) Friday, DTV was inundated by option trades, with overall volume nearly nine times a normal day. Overall, calls were the options of choice, with 52,000 contracts changing hands -- about 11 times many calls as normal. Puts were popular too, however, with six times as many contracts crossing the tape as is typically seen.

Nearly half of these puts were at one strike -- the April 55 put. All told, 11,378 contracts were traded at this strike, and with implied volatility rising more than three percentage points, volume exceeding open interest, and open interest spiking over the weekend, at least some of these puts were likely bought to open. Given the option's volume-weighted average price (VWAP) of $1.09, DIRECTV shares need to fall to $53.91 (strike price minus VWAP) by the expiration day of April 19 for these put buyers to earn a profit. That's nearly 2% off the stock's current levels, but if it doesn't make that plunge, all the investors can lose is the premium paid. On Friday, the option's delta was negative 0.49, meaning the trade had nearly a 50/50 chance of finishing in the money.

Technically, DTV has been on a bit of a roller coaster ride. After soundly beating earnings estimates in mid-February, DIRECTV shares actually dropped over the following week to a recent low of $47.71, but then recovered 15.2% over the last few weeks to trade at its current levels. For the year, DTV is up 9.6% and nearly 16% year over year.

Overall trading sentiment toward DIRECTV on the option market remains mixed. DTV's 50-day put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) is 0.88, and that is in the 72nd percentile of all readings taken over the last 12 months -- indicating a higher-than normal appetite for put buying in recent weeks. But the stock's Schaeffer's put/call open interest ratio (SOIR) stands at 0.78, and that ranks in the bottom 26% of the last 12 months' worth of readings. So according to that, call open interest is higher than normal (when compared to put open interest) for options that expire in the next three months.

This article by James Pilcher was originally published on Schaeffer's Investment Research.

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