Options activity signals a major development on the horizon for Time Warner (TWX)

Posted Aug 3rd 2007 12:43PM by Jon Ogg
Filed under: Time Warner (TWX), Options

The pesky little options that trade in Chicago, Philly, and Amex can provide quite a few insights for investors if you can pick out the important data early enough. It is always hard to judge the reasoning and intent of options traders, but it looks like there is growing conviction that there could be some large developments at Time Warner before mid-January.

Time Warner Inc. (NYSE:TWX) has gone back under $20 and that makes the further apart strikes more interesting to analyze. TWX Shares did well in 2006 because of activist-instigated strategies and the restructuring, but the recently released earnings and buyback announcement were trumped by the company backing off of previous growth expectations inside AOL. This unit is still far too valuable to just spin off entirely, but yesterday I laid out the scenario that seems the most likely -- AOL gets relaunched as the "AOL" ticker on NYSE as a tracking stock with Time Warner still holding the vast majority of shares.

The options for the next three calendar months offer only a bit of insight, but as you look at what were previously listed as LEAP options before this year, you get a clearer picture that there is conviction from bulls and bears alike:

The open interest in the August contracts is 18,600 in the $20 puts (in the money) and only 13,904 in the out of the money $17.50 puts; so bets aren't high that the stock goes down too much further. The $20 calls have less than 7,000 contracts in the open interest, so these are small bets here.
September has little conviction. The $20 puts and $17.50 puts don't even have 5,000 contracts combined in the open interest. The $20 calls have about 23,000 contracts listed in the open interest, but that is still fairly small.
October picks up a tad, although there looks like some carryover from when the stock was higher. The $20 and $22.50 calls have 23,161 and 25,341 contracts in the respective open interest. The $17.50 puts have over 18,000 contracts in the open interest, but this is still no huge conviction.
But check out January 2008: Traders must be expecting some major news because the bets are big on both the upside and the downside. In the call options the $17.50 strike has over 119,000 listed as the open interest and the $20 strike carries over 102,000 listed contracts in the open interest. Even the $22.50 calls and the $25 calls each have over 50,000 contracts in the open interest. The puts are active as well, but not as much as the calls. The $20 puts have over 65,000 in the open interest, and the open interest in the $17.50 puts and the $15 puts is carried as 91,042 and 80,034 respectively.

On a fully leveraged basis in lay terms, 10,000 options contracts represents 1,000,000 shares. Time Warner trades on average about 25,000,000 shares per day.

Jon Ogg is a partner at 247wallst.com; he does not own securities in the companies he covers.

Tags: AOL, calls, options, puts, time warner, TimeWarner, twx