Options are being used more and more by the big players to make big leveraged bets. Unusual options activity (UOA) is many times a tell that big hedge funds or institutions are positioning for a big move in the underlying stock. Once the trade hits the tape we can follow the flow and look to piggyback on the smart money.
UOA is first and foremost identified by the size of the trade. You can’t, however, just look for the biggest trades and say that is unusual options activity. It needs to be compared to the average size trade for that particular stock.
For example, 5,000 contracts traded in an Apple option would not be considered unusual. Apple trades 200,000 or more contracts every day. But 2,500 contracts traded on a smaller, less liquid stock would certainly be a more meaningful event. Usually, four to five times the normal volume would make it unusual.
Other indications that traders can look for include specific options contracts that are trading a high amount of volume compared to usual volume, or are out-of-the-ordinary trades. Volume is significantly higher than open interest. Trades took place on the offer side or well above the midpoint. Aggressive buying, where implied volatility has increased from previous day.
Here are three stocks that have seen unusual options activity over the past several trading days. They are:
Unusual Options Activity: Farfetch (FTCH)
Calls outpaced puts Tuesday by over an 18 to 1 margin, with 65,948 calls traded versus just 3,483 puts.
The March $30 calls saw 15,472 calls trade Tuesday with implied volatility (or IV) jumping nearly 10 vol points from 71.25 to 81.16 and an additional 3,592 contracts trade. This follows on the heels of over 28,000 of these March $30 calls trading last Friday. Open interest at that time was just 140 and IV was under 70 at that time.
The April $35 calls saw big volume Tuesday as well with 19,450 contracts versus just 413 open interest. It was accompanied by a big spike in IV from 64.16 to 73.58. Another 2,022 contracts traded.
This is the hallmark of aggressive repeat call buying.
FTCH stock is getting extremely oversold as it trades at lows not seen since September 2020. 14-day RSI is below 25 while Bollinger Percent B went negative. MACD and Momentum are nearing lows as well. Shares are trading at a big discount to the 20-day moving average.
The last two times these indicators aligned in a similar fashion marked significant short-term lows in FTCH stock. Perhaps some big trader is thinking that the selling in Farfetch is nearing the end and buying options to lever up for a sharp counter-trend rally. Earnings are due Feb. 17.
Las Vegas Sands (LVS)
Calls were active again Tuesday with just over 112,000 trading. This compares to just 30,000 puts.
Much of the volume was in the very short term January calls that expire today. Over 17,000 of the January $45 calls traded versus less than 14,000 open interest. Implied volatility rose over a full vol point as well even with the stock slightly higher. Last Friday saw massive volume with over 27,000 of the January $46 calls trading. Open interest was just 1,646.
Option players are perhaps betting that the bullish news out of Macau will propel Las Vegas Sands even higher. InvestorPlace writer William White noted this in his recent article.
LVS stock is getting to overbought levels so caution is warranted. 14-day RSI is nearing 70. Bollinger Percent B is still above 100. Momentum and MACD are at extremes as well. The previous time this happened marked a significant top in LVS. Earnings are due Jan. 26.
Unusual Options Activity: Uber (UBER)
Uber has seen big repeat call buying in the traditional February options. Over 28,000 February $42.50 calls traded Tuesday versus just 11,677 open interest. IV exploded from 56 to over 63.
Last Friday saw big volume as well in the February call series. Over 17,000 of both the February $40 and $45 calls traded. This moved the IV from 53 to 56 on these strikes.
On Tuesday, 40,403 contracts of the February $37.50 calls traded with IV at the 65 level.
UBER stock is extremely oversold. Nine-day RSI is well under 30. Momentum and MACD are at recent lows. Bollinger Percent B is now at the most negative reading of the past 12 months.
The last time all these indicators aligned in a similar fashion marked a major intermediate low in UBER. Perhaps some big player is positioning for that again. Earnings are due Feb. 9.
Option trading continues to grow each year. 2021 saw record option volume with daily trading volumes swelling by 35% versus 2020. It is vital for traders to embrace option trading and the benefits it can provide to up their trading game as we enter 2022.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim and 3 years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related. He has also been invited for reoccurring appearances on CNBC’s Volatility Playbook.