"NAB leaking on the inside ...."

The normal average daily share turnover for NAB is around 5.8 million per day, however on Thursday 26th September more than 10.7 million shares were traded before noon with the day finishing with around 15 million shares being traded.

NAB share volume - 26-9-2013

Another interesting observation was that NAB's share price has been surging recently from a low of around $29 four weeks ago to a current price of around $35.45.

NAB share price surges to drive a wave 3 high - 27-9-2013

So who is driving the interest ? If we look at the 5,35 Oscillator which tends to indicate retail buying we can see it has curled over and is dropping, but the 10,70 oscillator which tracks institutional buying is still growing strongly.

Retail - 5,35 Oscillator

Institutional - 10,70 Oscillator

So we have price and volume surging and it seems to be driven by the institutional buyers pushing the Elliott count to a strong wave 3 high. Clearly a good question is where is the price rise likely to slow and head down - just what is a reasonable peak price for NAB? One of the ways we can investigate this question is to look at the CALL option volumes for October to see where the smart money is putting the option volume.

NAB PUT Option volume - 26-9-2013

Now for every share buyer there must be a seller and when we looked at the Call volume compared to the PUT volume, the $34 PUT options are materially pumped up at 8,900 contracts with around 7,300 being done before noon, compared to the usual average of around 100 - 300 contracts. At the time this PUT volume was transacted the deltas for this strike was around 22. Interestingly, a few days earlier when the NAB price was lower, the PUT volume was going through on the $33 PUTs with the volume of PUTs reaching 13,300 which is also materially above the daily averages, and at the time the delta was also around 25.

As an option trader, the most cost effective point to buy options is at a delta between 25-35 as this is the flat spot just before the delta curve really steepens up. The logic for this type of strategy is that if you are right on direction, the option really picks up value via the faster leverage as the deltas increase non linearly. However if you are wrong, the options slide back onto the flat part of the delta curve and you do not lose much of your option investment.

The key point here is that this PUT volume is really extraordinary. Thus the indication here is not so much the buying strength from the institutions, but rather the selling strength and with the current price at $35.40 at a wave 3 high and a wave 4 retracement in the wings, it seems further confirmation that the wave three is correct and a wave 4 is following.

Now, with price and volume surging, combined with enormous PUT option volumes being placed on NAB, this would seem to suggest that someone at NAB has leaked some sensitive market moving news or that some of the key institutional players know something about NAB, such as an unfavorable announcement around profit guidance or M&A activity etc. that may be due for release to the markets soon and they are getting in ahead of time before the price declines. If this is what is causing the abnormal trading activity, it would seem that the institutional traders may be continuing to push the price of NAB up close to when the announcement is due to take place, whilst simultaneously they also buy considerable downside protective PUTs to lock in their profits, leaving the poor retail investor to foot the bill for the institutions profits as they sell out at the price high on the extended Wave 3 high, and take further profits from the heavy investments in very large protective PUT positions.

Time will reveal just what the insiders know and a Fibonacci time projection suggests around October 3rd is a clustering of actions.

Just remember that the ASX is not that deeply liquid at the best of times, and with these abnormal PUT volumes lurking, caveat emptor .....

Cheers