Alexander Valtsev
All posts from Alexander Valtsev
Alexander Valtsev in Alexander Valtsev,

Unusual Options Activity In Blackstone's Stock

A quick scan of unusual options activity over the last two days identified an interesting trade in LEAPS:

(Source: Yahoo Finance)

As you can see in the table above, an investor(s) purchased over six thousand Blackstone’s (BX) call options with a strike price of $28 expiring in January 2018. The position is quite large both in absolute (an equivalent of 600,100 shares, or a $1.89M option position) and relative terms:

(Source: TD Waterhouse)

Notice the high open interest in $28 and $30 call options. Given the fact that the stock closed at $26.84 on Friday, July 29th, both strikes are out-of-money. My calculations show that the $28 calls are fundamentally undervalued:


In the above illustration, you can see that implied volatility is below-average on a historical basis, while the option has been fundamentally undervalued over the duration of its market history.

The $28 calls are worth around 11% of the current market price of the stock, while the strike itself is around 4% higher than the closing price of the shares. Although I think that Blackstone’s shares have a high chance going above $30 per share over the next eighteen months, I recommend selling higher-strike calls in order to fund the purchase of the $28 calls. Here is how the recommended trade looks like:


As you can see, this combination brought the cost of the trade by over 75%, also locking a certain profit:


The maximum profit with this trade is $131 per share, if the stock goes above around $30 per share. This translates into a 1.9:1 risk-return ratio, which I find attractive for this type of trades. In addition, the margin requirement is quite low with this trade (compare the cost of this call spread to the actual purchase of share – even if you sell the $30 calls to bring down the cost basis of the equity position).

The relative cheapness of the options, the high probability of success of this trade, and the confirmation from institutional investors make this trade appealing to me.