In last week's edition of Trading Tools,
Comcast Corporation (NASDAQ:CMCSA) was analyzed after the
Zacks Unusually High Option Volume screener revealed a spike in pre-earnings pessimism. Employing the same filter for today's column, a different security caught my eye: Overland Park, Kan.-based communications concern
Sprint Nextel (NYSE:
).
Before we begin, let's explain the contrarian stance that makes Schaeffer's so unique. When searching for a bullish pick, we like to see heavy skepticism toward an outperforming stock, as this leaves ample room for upgrades or other positive catalysts to fuel the stock higher. When searching for a bearish pick, on the other hand, contrarians are looking for significant bullish sentiment toward an underperforming stock, as we believe an excess of optimism is a sign that everyone has already bought into the stock and sideline money is virtually tapped out.
However, keep in mind that some optimism and pessimism is genuinely warranted and isn't always a contrarian indicator - like an outperforming stock with many "buy" ratings or an underperforming stock with a plethora of "sell" ratings.
According to the Zacks screener, call speculators swarmed S on Thursday. The equity saw roughly 33,300 calls change hands, tripling its average daily volume of fewer than 11,000 contracts.
The Strategy
It appears that a trader may have opened a calendar spread on the security. The Aug 4 call added more than 2,400 new positions, lifting its open interest to 58,178 contracts. At 11:36 a.m. Eastern time, a block of 2,500 contracts crossed the tape at a bid price of 12 cents. Meanwhile, the Sep 4 call traded a block of 2,500 contracts at the same time at an ask price of 28 cents.
A calendar spread (or, as it is sometimes called, a "horizontal spread") takes advantage of time decay, through the simultaneous purchase and sale of options with the same strike price, but different expirations. Calendar spreads benefit from time-value differentials during periods of reduced volatility (i.e., trading-range environments). Typically a neutral strategy, this spread can have a bullish or bearish bias as well, depending on the options employed. If a trader has a slightly bullish bias, he will use calls, while a trader with a somewhat bearish bias will use puts.
A trader wishing to buy or "go long" using a calendar spread, as in the case of the S trader Thursday, would buy the longer-dated option and sell the shorter-dated one.
