Options Activity for Friday, June 11, 2010

I hope that your trading session is going well, as I know that members of S.O.M.E. are making the most of the market movements and their returns.

China-based stocks have accumulated quite a bit of attention on Wall Street lately, as investors digest the country's economic backdrop. Most notably, the nation Thursday morning said its trade surplus widened to $19.5 billion in May, from $1.7 billion the month prior, exceeding expectations for a surplus of $8.2 billion. Furthermore, exports skyrocketed 48.5% in May from a year earlier, marking the sixth consecutive month of export growth for the country.

However, even before the highly anticipated economic data hit the Street, bullish option bettors bombarded telecom titans China Mobile Ltd. (CHL) and China Unicom (CHU). Tipping the bulls off ahead of the report could've been Wednesday's Reuters article, which cited a senior Chinese government official as stating exports would jump about 50% year-over-year. (He was right.)

Taking a look first at China Mobile Ltd. (CHL), the stock saw single-session call volume soar to more than double the norm yesterday, with roughly 3,300 contracts traded by the closing bell.

The equity's at-the-money June 50 call was most active, with almost 1,500 contracts traded – 85% of which crossed the tape at the ask price, suggesting they were bought. Plus, call open interest at the round-number strike advanced overnight, pointing to a healthy dose of freshly purchased bullish bets on CHL. However, the 50 strike was already most popular among front-month traders, with around 6,000 calls in residence.

Technically speaking, the $50 level has been a point of contention for the shares of CHL for almost two years now. In fact, this round-number region has been breached only twice on a monthly closing basis since August 2008. Furthermore, the aforementioned call open interest at the June 50 strike could act as an added layer of options-related resistance in the near term.

Moving on, China Unicom (CHU) also saw notable call activity Wednesday, with daily volume jumping to about five times the norm. More specifically, the equity saw around 800 calls change hands, compared to its predicted single-session volume of fewer than 200 contracts.

The activity at the out-of-the-money October 15 call was very interesting, with about 120 contracts traded – most of which crossed at the ask price. Furthermore, nearly all of the longer-term calls translated into fresh open interest overnight, underscoring our suspicions of buy-to-open activity.

Digging deeper into the data, the sudden affinity for October-dated calls could be attributable to rumors that China Unicom will introduce Apple Inc.'s (AAPL) iPhone 4 to China. While the firm's vice president didn't disclose a timetable for the expected debut, several media outlets suggested the company will begin selling the new smartphone in September.

However, in order for the 15-strike calls to profit, the shares of CHU will first need to violate a couple of key moving averages. Most notably, the stock has given up about 8% in 2010 thanks to unwavering resistance from its 10-month and 20-month moving averages. This duo of trendlines has stifled the security's rally attempts for more than two years, and could continue to exert pressure on the charts.

Interestingly enough, yesterday's affinity for calls on CHL and CHU runs counter to the skeptical skew among the short-term options crowd. Short-term options speculators have actually been more bearishly biased toward the stock only 12% of the time during the past year. In the same vein, CHU's SOIR of 0.61 ranks in the 76th annual percentile, implying that near-term traders have been more pessimistically positioned toward the equity only 24% of the time during the past 12 months.

Should CHL and CHU ride the China wave significantly into the black, the skepticism surrounding the stocks in the options pits could be a boon, from a contrarian standpoint. However, the securities will likely have to get those technical monkeys off their backs – defeating long-term resistance levels – before truly spooking the bears into abandoning ship.


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