Activist investor Jana Partners is very well known by options traders. The firm, which recently bought a Whole Foods position, pushed for a sale to Amazon and then cashed out for a quick $300 million profit, often uses options to build a position.
Yesterday, it was announced that Jana has taken a stake in Hewlett Packard Enterprises (HPE). If you follow my daily order flow list, you know that bullish options trades in HPE have been picking up recently, and the stock was a top-three candidate for a new position. Here are the trades made last week:
Buyer of 8,000 November 18 Calls for $0.87 – Stock at 17.75
Buyer of 9,000 January 20 Calls for $0.41 – Stock at 17.75
These trades followed a mid-July buyer of 11,000 August 17 Calls for $0.38.
And the trade that brought HPE to my attention originally was a bull risk reversal trade made in June. Here is that trade:
Buyer of 10,000 November 18 Calls for $0.81, and Sale of 10,000 November 16 Puts $0.63—Net paid for the position: $180,000.
As I’ve noted in the past, these bull risk reversals are a favorite tool for hedge funds and are just about the most bullish trade you can execute using options because both components of the trade are bullish: the call buy is bullish and the put sale is bullish.
And what makes these trades so profitable (if they work) is that the premium collected via the put sale often pays for the premium paid for the call purchase.
However, there’s big risk in bull risk reversals if the stock were to fall. For example, if HPE fell below 16, this trader would be responsible for buying one million shares at 16. This trader, which may or may not be Jana, was likely willing to buy the stock at 16.
Here was an options education piece I wrote on bull risk reversals:
A risk reversal is typically used when a rise in the price of the underlying asset is expected. This strategy is typically the sale of an out-of-the-money put and the purchase of an out-of-the-money call. The trade has unlimited profit potential to the upside and extreme loss potential to the downside.
For example, a January 20/25 risk reversal for a $1 credit would be the sale of the January 20 Put and the purchase of the January 25 Call. If the stock stays between 20 and 25, the trader collects the $1 credit. If the stock goes to 20 or below, the trader will be forced to buy the stock. If the stock goes to 25 or above, the trader will exercise his right to buy the stock or simply sell out his call for a profit.
Interestingly, HPE, which has been trading poorly since its earnings disappointment in late May, is not popping higher on this Jana news. Because of this, I may stay away unless the stock strengthens or bullish option activity continues in the days to come.