Connecting with volatility

Tech has been at the center of the earnings story this week, but early Thursday a decidedly non-tech company—Ball (BALL), maker of aluminum containers—made something of a splash after releasing its numbers.

Around midday the stock appeared on a few scans for unusual options activity, including both high call volume (14.2 times average) and high put volume (13.5 times average). The rough balance between the number of calls (6,593) and puts (6,872) was no coincidence, as the “unusual” part of the activity consisted of matching trades (5,000 contracts) in the March $65 calls and March $52.50 puts:

Long-time traders may have flagged two key aspects of this activity:

1. Traders appeared to be getting into the market, not out of it. For both options, volume was higher than the open interest (OI), which means these could represent new positions rather than liquidations of existing ones.

2. Simultaneous execution. Both trades occurred at the same time, around 9:50 a.m., when the stock was trading around $59—roughly the midpoint of the two strike prices.

While these two points don’t prove the trades were connected, they make a compelling argument that they could be. Many traders would see same-size trades in an out-of-the-money call and an out-of-the-money put as a possible strangle, a strategy that ignores price direction and instead attempts to capitalize on an increase or decrease in volatility.

A trader who buys both options (a long strangle) can profit if the stock moves up or down, as long as it moves enough to cover their combined cost. A trader who sells both options (a short strangle) will profit if the stock remains between the two strike prices, in which case the options will expire worthless and the trader keeps the collected premium. In other words, a long straddle benefits from increasing volatility, while a short straddle benefits from declining volatility.

If yesterday’s activity does, in fact, represent a large strangle, BALL’s price chart raises some interesting questions about whether the trader who initiated the position was going long or short:

On Thursday, BALL took traders on quite an intraday ride. By noon ET shares had swung from down 1.1% for the day to up 7.8%, pushing the stock close to its December high a little above $60. The weekly chart inset shows this level is in the vicinity of longer-term resistance at previous highs dating back to early 2023 (dashed line).

At expiration, a trader who shorted this strangle would keep all the collected premium (around $400,000, using the combined cost of the options, $0.80, at 9:50 a.m. ET) if the stock closed between the two strike prices. A trader who bought the strangle would need the stock to be at least $0.80 above the call’s strike price or below the put’s strike price ($65.80 and $51.70, respectively) to turn a profit.

Either way, the outcome will be based on the direction of BALL’s volatility, not its price, over the next several weeks.

Today’s numbers include (all times ET): Employment Report (8:30 a.m.), Consumer Sentiment (10 a.m.), Factory Orders (10 a.m.).

Today’s earnings include: AbbVie (ABBV), Aon (AON), Avantor (AVTR), Bristol-Myers Squibb (BMY), Chevron (CVX), Regeneron Pharmaceuticals (REGN), Ubiquiti (UI), Exxon Mobil (XOM).

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