Universal Investment Strategies | Insider Options Trading (IOT) many times is a ‘tell’, a signal that there is a likelihood of a potential large move in the underlying stock. This informed activity is usually initiated by hedge funds and institutional traders. These insiders will use the options market to make very large bets to profit on the leverage that options provide. Frequently they will use the options market to pre-position in advance of an impending news announcement, such as a takeover, that may not be public knowledge.
Hedge funds are using options to a greater degree on a daily basis. Famed hedge fund manager Carl Icahn used options, not stock, to take his large positions in Netflix and Herbalife. Bill Ackman of Pershing Square, the noted adversary of Mr. Icahn, used mostly options to take a very big stake in Target Stores stock.
So our goal is to uncover what the big players are doing and follow along with them in the most profitable manner possible. It requires knowledge, skill and diligence, but the payoff can be enormous.
For those unfamiliar with listed options, they’re classified as either calls or puts. A call gives you the right to buy stock (usually 100 shares), while puts give you the right to sell stock. A call buyer would be taking a bullish stance, while a put buyer would be taking a bearish stance.
Discerning unusual options selling certainly has value, especially on the put side, but the focus of this article will be on uncovering unusual options buying …specifically call options buying.
IOT is first and foremost identified by the size of the trade. But you can’t just look for the biggest trades to discover the unusual aspect of unusual options activity. One has to compare it to the average size trade for that particular stock. For example, 2,000 contracts traded in an Apple option would not be considered unusual, since Apple trades 100,000 option contracts or more daily. But 2,000 contracts traded on a less liquid issue would certainly be a more meaningful event. Normally 3-4 times the normal volume would qualify as unusual.
Another screen we employ is to compare volume to open interest. Open interest represents exiting positions outstanding that still need to be closed. If the volume exceeds open interest, you know it is a new opening position, which has more informative value than a closing position.
We also look to see that the large orders move the implied volatility of options in a meaningful manner. Implied volatility is just another way of stating the price of options. So a large move in the options price, represented by an increase in implied volatility, is a more powerful trade signal than a large order that has a lesser impact.
Finally, we look to uncover if the trade took place on the offer price, meaning the buyer was aggressively willing to pay the higher price to get the trade executed. Trades executed on the offer tend to be a much more meaningful indicator.
While all this may seem to be a daunting process, there is an easier option. We use options scanners to screen out potential unusual options based trade opportunities, in a much more streamlined manner. The technology they employ allows filtering for size, open interest, and trade in relation to bid/ask, plus it is available to the individual trader.
So let’s run through real examples from trades we made start to finish…
Fiat Chrysler (FCAU) January 10th entry | Universal Investment Strategies
We see 16,500 January 10puts bought for .15-.25c on Fiat Chrysler against an open interest of 573. Recent sales indicate this is one of the worst performing automaker and today’s revelation from the US Government Agency the EPA that it cheated on diesel emissions provides the impetus for a short term sell-off similar to Volkswagon.
We see 16,500 January 10puts bought for .15-.25c on Fiat Chrysler against an open interest of 573. Recent sales indicate this is one of the worst performing automaker and today’s revelation from the US Government Agency the EPA that it cheated on diesel emissions provides the impetus for a short term sell-off similar to Volkswagon.
January 13th exit which was one day later, we sold at .40. Based on the purchase of 12 contracts at .18 per contract totaling $216.00 for one trade, we had a total gain of $480.00, a 264.00 profit, which is a gain of 122% in one day!
Lowe’s (LOW) February 6th entry
2,850 March $72.50 calls bought from $2.12 to $2.19 into the lows of the day and now volume climbing over 4,200 up to $2.23. Today’s action looks to be adding to more than 5,450 in open interest from 1-18 buyers at $1.73 to $1.79 and still has some notable February open interest and longer-term bulls in the January 2018 $67.50 calls
2,850 March $72.50 calls bought from $2.12 to $2.19 into the lows of the day and now volume climbing over 4,200 up to $2.23. Today’s action looks to be adding to more than 5,450 in open interest from 1-18 buyers at $1.73 to $1.79 and still has some notable February open interest and longer-term bulls in the January 2018 $67.50 calls
March 17 exit which was 3 weeks later we sold at $11.10. Based on a $212.00 trade, making a total gain of $1,110.00 a 895.00 profit, which is a gain of $416%.
AMC Entertainment (AMC) March 3rd entry
Trading over 17X average call volume today with a buyer of 2,000 April $29 calls at $1.40 in a stock replacement where 2,500 opened earlier this week. Shares are down following earnings and below its 200 MA, but touching the 38.2% Fibonacci and just above its weekly cloud, a potential bounce spot. The $3.85B theater operator trades 28.5X Earnings, 1.25X Sales with a 2.7% yield. AMC is coming off a strong quarter which topped revenue estimates easily with Admissions up 18.1% and Food & Beverage up 16.6%. AMC looks like an interesting name at this level on the charts, though still fairly rich on valuation. I think the stock can be traded versus today’s low if looking for a nice reward/risk.
Trading over 17X average call volume today with a buyer of 2,000 April $29 calls at $1.40 in a stock replacement where 2,500 opened earlier this week. Shares are down following earnings and below its 200 MA, but touching the 38.2% Fibonacci and just above its weekly cloud, a potential bounce spot. The $3.85B theater operator trades 28.5X Earnings, 1.25X Sales with a 2.7% yield. AMC is coming off a strong quarter which topped revenue estimates easily with Admissions up 18.1% and Food & Beverage up 16.6%. AMC looks like an interesting name at this level on the charts, though still fairly rich on valuation. I think the stock can be traded versus today’s low if looking for a nice reward/risk.
March 17th 2017 exit which was 2 weeks later we sold at 2.86. Based on the purchase of 2 contracts at 1.40 per contract, totaling a 240.00 trade, the total profit was 572.00, a 292.00 profit, which is a gain of 104%.
All IOT will not be this foretelling or profitable, but by following the big and unusual options order flow, many times we can put ourselves in a position to profit.
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