Very light volume today. Total options activity included 6.5 million calls and 5.3 million puts, which is only about 70 percent the recent average daily. There was not a whole of to write about and not much order flow for finding a good Trade of the Day. So, let’s update the HRB Strangle that we wrote about on April 15. At the time, shares were at $17.60 and the Jul 17 – 18 strangle was trading for $2. Recall that, one reason we liked the trade is that there had been some substantial put spreads purchased in HRB (Use Flow Monitor for historical color. Enter HRB and then 1. Then, + for previous color).
Today shares lost 7.6 percent to $15.93 after a group of bond investors went after a defunct unit of H&R Block related to soured mortgages. My guess is that the spread traders on April 15 knew this was happening. We looked at a strangle (buying July 17 puts and July 18 calls) because it wasn’t clear what was driving the action, but the expectation was for an increase in volatility. HRB shares are under fire and implied volatility in HRB options jumped 49 percent to 49 Monday.
The strangle is now worth $2.30 instead of $2. The calls, which were bought at $1, are now trading for 40 cents. Time decay has been a factor as well. Meanwhile, the delta of the trade is from 0 to -.34. So, we are now in a decidedly bearish trade — which is okay. So far so good. If the stock recaptures $17, I’d exit the position. Also, if we notice the large put spreads being unwound, that might be a signal to exit the trade as well. For now, I’d suggest holding it and wait for the next shoe to drop on H&R Block.
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Frederic Ruffy is a well-known trader, writer, and strategist who has spent years educating investors and creating intelligent, insightful, unbiased market observations that are frequently cited by the Wall Street Journal and other financial publications. As senior analyst, Fred provides frequent and regular notes and daily updates for activity of interest.