True Cheating or Impatience ?

Yesterday‘s Cheater report was very interesting. It flagged FDO Family Dollar Stores as a stock with options activity above my threshold of 500. The number doesn’t matter, it just restricts the results to the top few with high probability.

Now because the score my system gave it was negative, the stock was actually showing a sudden retraction of open interest, and because the score was for Put options, the open interest on Puts must have decreased dramatically enough to get flagged.

If you run a quick analysis of the Open Interest on FDO, you see that the OpenInterest rose quickly and came back down quickly. I did not flag the rise, even though it was larger in magnitude than the decrease. I am not sure of why.

The interesting thing about this is that the decrease in Put contracts missed the almost 8% drop in FDO on 12/11/12.  What this appears to be is either an opportunistic trader got scared of being found out, or got too impatient, or perhaps thought the insider information was not reliable. Either way, this is definitely an instance of true insider trading. And in case you think that the move in FDO was purely random, make no mistake, this move was definitely nothing random. It could be caused and orchestrated by HFT systems somewhere that propelled the stock price down , mst likely because they see the same data we see and incorporate their stock buying/selling strategies based on open interest. This is not big institutional traders putting weight on the stock because it opened lower that the previous day, but not that much lower, and it gapped a little.

Stocks only move down for two reasons, attrition of buyers and surge of sellers. Which one do you think happened ? Of course it was attrition of buyers, because a surge of sellers looks like a dog pile, not like a slow adjustment of expectations. If you look at any intraday chart for FDO during the day of the drop, there are no financial news that could explain a surge, and the decrease in price is sudden, tapering off at the end of the day. A surge in sellers looks much different, as panic sets in and the decrease in price would accelerate during the day.

The attrition of buyers, for no obvious reason could have been triggered by news related to the fiscal cliff affecting low income families, but more likely it was a calculated move by a large fund to push the stock down before they start a buying operation. To pull this off, they place a large naked sell order that forces a small gap down after the morning auction. Once the market opens, they continue buying at lower prices to clean up the order book as it moves down. This will fill all orders for contrarian buyers that have their buy orders triggered and push the stock down further. Once the stock starts seeing sellers trickle in, few buyers will remain and the fund can now start buying their planned lot, little by little during the day.  The volume on the chart confirms this, as the volume stays fairly constant during the day. On that day 6 million shares of FDO were traded. The next day, the stock is likely to remain at those prices and they can continue to fill their large orders at much better prices while value investors jump in to explain or ponder over the new price.

One last note, the Put option position, if it had been left alone was for close to 820 contracts, which make this position worth 820*100*$5= $410000. It is also possible the move was designed by such a fund to trick HFTs and Automated traders into selling lower. If you plan on buying up 6 million shares at a price in the range of $70-$65 for a total of $420-390 millions, would it be so bad to enter and risk losing $410000 ?

Of course not.


Date Ticker CallOpInt PutOpInt
2012-12-07 11626 8513
2012-12-06 11620 9330
2012-12-04 11256 8268
2012-12-01 11281 8140
2012-11-30 10769 7104
2012-11-29 10138 7013
2012-11-28 10119 7002
2012-11-27 10103 6994
2012-11-24 10062 6977
2012-11-23 10035 6932

About smartmillion

My name is Anthony. I am 45 years old and I am broke.
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