Why You Should Follow Unusual Option Activity
Let Large Funds Do the Due Diligence
You may have heard the term unusual option activity but never understood the thought process or looked deeper into it. I believe that unusual option activity is something every trader should keep their eye on, if not base their trades around. My theory behind watching unusual option activity is simple.
If a fund, firm, or trader is willing to risk over a million dollars on a trade, I typically demonstrate confidence within their due diligence and will take the trade as well. I do, however, conduct my own due diligence and don’t follow the trade if it is conflicting with my thoughts. Not every large option trade turns profitable, Wall Street traders realize loses as well, however with my experience more often than not there is an opportunity to make money.
The Thesis
Simply put, a trader follows unusual option activity on the basis that the fund or firm has many analysts completing hours of due diligence on the stock and that the funds, firm, or trader may know something you don’t, such as chatter surronding a buyout.
For example, on December 29th, 2016, Kate Spade opened at $14.58 per share. Soon after the open, 2,000 contracts of the January 17 calls were purchased for $0.20. Less than 20 minutes later, there was news regarding Kate Spade buyout interest. The January 17 calls became worth $2, realizing a profit of $360,000.
How to Trade Unsual Option Activity
After coming across the unusual option activity, it is important to determine whether the trade is a bullish or bearish bet. This involves viewing whether a call or put was traded and whether it traded on the bid or ask. I will go more in-depth on how to trade unusual options in a future article. Follow me on Medium to be notified when that article is published.
Examples of Trading Unusual Option Activity
The best way to demonstrate what’s possible when following large activity is to share previous examples. These are somes examples of activity from the week of May 8th- May 12th.
Snap Earnings Play: On May 8th, 17,950 of the 19MAY17 $21.50 Puts were purchased for .90c. This trade was a play based on Snap Inc. reporting worse than expected earnings. On May 10th, after the close, Snap did indeed report earnings that disappointed investors, the stock sold off and opened at $17.94 on May 11th. According to open interest and May 11th volume, the puts have not been sold back.
The trade:
Bought 17,950 of 19MAY17 $21.50 Puts for .90c= $1,615,500
Theorically, Sold 17,950 of 19MAY17 $21.50 Puts for 3.90= $7,000,500
Theoretic profit= $5,385,000
Disney Earnings Play: On May 9th 1,480 of the DIS 19MAY17 111 Puts were purchased for 1.35. This trader had conviction that Disney would miss on earnings and the stock would fall. Following the earnings annoucement, Disney’s stock price did fall and opened up at $109. Below is a chart of the 111 Put price following the earnings release.
The trade:
Bought 1,480 of the DIS 19MAY17 111 Puts for 1.35= $199,800
Sold 1,480 of the DIS 19MAY17 111 Puts for 2.95= $436,600
Profit= $236,800
Trading these two earnings along side the unusual option activity would have had you realizing nice profits. These two trades happen to be the only two I followed this week, however these trades are occurring daily. If you’d like to be informed on other large option activity or how to find the trades yourself, follow me on Medium where I will post more articles regarding the topic.
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