Traders Cash Out of El Paso

El Paso Corporation (NYSE: EP), an energy company, which operates in the natural gas transmission and exploration and production sectors, is seeing massive action in its in-the-money calls this morning. The April $5 call was sold 77,000 times for $6.25 and the April $7 calls were purchased 12,500 times for $4.25. The volume exactly matches to open interest on both strikes signaling that these are closing trades. Although the two strikes traded five minutes apart, it is quite clear that the trades were linked as well.

This trade in El Paso Corporation is clearly the closing out of an in-the-money call spread position. When traders buy in-the-money call spreads they are looking for the stock to remain above the highest strike from the trade date into expiration in hope that the spread widens out to its largest level (in this case $2.00, the difference between $5 and $7). This trader was able to sell out of that position and reap the full $2.00 because the stock is so far above the highest strike that the likelihood of the stock falling down to the $7 is all but priced out of the market now.