In Monday’s sometimes accurate heat-seeking option markets, it looks as though one trader may still be looking for fireworks in OmniVision (OVTI). The optical chip / image sensor supplier with ties to Apple (AAPL), amongst other customers, has strayed technically in recent weeks as shares have retreated north of 35% over the past three months largely over margin and inventory concerns and a below views EPS forecast tied to a ramp up in its BSI-2 sensor.
The threat of new technologies and the competition stealing customers like Apple with the next, next big thing can’t be denied. Last year for instance there was a head-to-head with Sony (SNE) and its competing chip technology. However, running through recent headlines and analyst comments on OmniVision, our takeaway was the company is expected to be positioned as a supplier for the next iPhone when its unveiled and may be the sort of spark set underneath one or more bulls in its calls today.
OmniVision’s options came across our radar this morning after a cursory scan for unusual volume in Russell 2000 constituents revealed an increase of about 250% above average on net activity of 12,300 contracts. A quick scan of the board showed roughly 70% of the volume concentrated in the July and August 15 calls on trading of 6,500 and 2,700. Closer scrutiny of those contracts uncovered one print just north of 6,400 contracts for $0.09 in July followed seconds later by a bevy of prints totaling roughly 2,600 for $0.35.
A modest increase in implieds of both calls could suggest coincidental buyers coming into the product to either open or close positions. But given premiums are still range bound, didn’t shift too abruptly and residing open interest of 13,700 and 2,100 respectively, the net situation doesn’t allow for a clean interpretation of what might have occurred.
Figure 1: OmniVision (OVTI) vs. Apple (AAPL) Daily Overlay
Could the action be something else? We think there's a chance it could. Given the disconnect of late in shares of OVTI and AAPL, the idea of an existing long call holder rolling out his or her bet as the front month contract comes under extra potential duress due to theta, seems like a possibility. This seems more plausible with Apple shares doing a bit of heavy technical lifting in Monday’s session with the stock up 1.15% and holding its out-the-gate breakout of a key pivot high set in June.
Some may see the reduction in contract size as a reasonable compromise to rid oneself of potential theta risk in July, if the two contracts are actually linked as a roll by a long call holder. However, while this trader would gain time until expiration, an extra 28 calendar days to be exact, it does come with its own cost of doing business which shouldn’t be overlooked. In this instance, the dollar cost of a roll out into August would be approximately $33,500 or so, which would be in addition to the original and unbeknownst to us, cost of the July call position.
Is it bad to throw more capital at what we’d assume is a paper loss? Without wanting to be the judge or jury and preferring to just offer out some food for thought; we’d hope the trader is at least in position to add to this sort of position as, when all is said and done, they’ve still only committed what they can afford to lose, should the disconnect shown in Figure 1 with the likes of Apple, continue to take a turn for the worse.
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
Optionetics.com ~ Your Options Education Site
Visit Chris Tyler’s Forum
The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.