If the investor day is received well by the market and Tesla’s stock price goes up, the institution would benefit from holding on to their stock position but would simply lose the premium they spend on the OTM put options. Instead of reducing the position size to mitigate short term risk, the fund can purchase a high number of far OTM put options as a hedge which would be detected as an unusual option activity. As an alternative it’s much easier to purchase a hedge than liquidate and buy back large positions.įor example, let’s assume that a fund has a high ownership in Tesla and that the company is hosting an investor day which could result in short term volatility. Since institutions own such large positions, it can be difficult to liquidate or buy back positions if they are expecting volatility in the short term. However, institutions also track annual returns and short term fluctuations in the stock prices can heavily decrease their returns. We need to remember that institutions own a large portion of the stock market and they often hold their positions for long periods of time. But it’s also important to know that unusual option activity can also be used by institutions as a hedge to combat short term fluctuations in stocks. We’ve discussed the characteristics of unusual options activity and how they can represent a big bet on the underlying price of the stock. Tips on trading unusual options activity Unusual options activity can also be a hedge When unusual options activity shows up for weekly OTM options it’s a strong signal that someone knows something since they’re expecting a very large movement in the underlying stock price over a very short period of time (by the time of expiration). Weekly option expiration (or some short term period).Using Cheddar Flow we can look at the individual option orders placed and if we see that the 50,000 contracts were largely made using one or two orders, then that’s a big indication of unusual options activity.įurthermore, it’s even better to look for unusual options activity that involve: If the volume on that option contract reaches 50,000 on one of the days, that means someone is placing a big bet on the direction of TSLA in the short term. Majority of the daily volume of an option contract is from one very large trade (indicates large concentration)įor example, the TSLA $730 Call Option with 04/30 expiry has an average daily volume of 9,000 contracts.Daily volume of an option contract is much higher than average (can be 5-10 times higher than average).There are several characteristics that are specific to unusual options activity, specifically: Characteristics of unusual options activity Traders and investors that have this non-public information may be making a large bet using unusual option activity. These can be an early release of earnings, a company acquisition, an executive leaving, etc. Non-transparent catalysts involve events that are not scheduled or made known to the public. These events are known by the general public and traders may have proprietary information that they use to place an unusual option order. Large volume on option contracts can indicate that someone is making a bet based on transparent or non-transparent catalysts.Ī transparent catalyst is a public event like an earnings call, company conference, or a product launch event. Unusual Options Activity involves option contracts being traded at a much higher volume than their daily average.
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