While no participating entity in the capital markets is infallible, retail investors may nevertheless find comfort in targeting opportunities – or exiting from them as is the case here – based on unusual options activity. For this edition, we’ll be exploring stocks to sell based on the rumblings printed by the so-called smart money.

To lay the framework for understanding unusual options activity, we must appreciate the concept of implied volatility (IV). Think of IV as the scouting report of a baseball prospect. By itself, a scouting report doesn’t guarantee that the targeted player will pan out. However, it does suggest heightened interest. So, if a team wants to pick up the prospect, it will have to fork over a higher premium.

On the other hand, an established star player may command so much value that a team seeking to fill gaps in its organization may want to sell or trade said player. In this case, a team may believe the athlete’s best days are behind him. Understanding the possible motivations behind unusual options activity can help you make data-driven decisions. With that, these may be the stocks to sell based on peculiar derivatives trading dynamics.

Vita Coco (COCO)

At first glance, Vita Coco (NASDAQ:COCO) does not seem like a natural candidate for stocks to sell for any reason. Since the beginning of the year, shares have more than doubled in value. However, COCO offers an excellent example of letting the data guide your decision-making process.

Yes, COCO has performed very well. But recently, in Barchart’s screener for unusual stock options volume, trading volume for puts heavily outweighed calls. To be clear, that by itself doesn’t mean much since selling options generally features the opposite sentiment of buying them. Still, a closer investigation of its volatility smile warrants caution.

A volatility smile plots IV at various strike prices. Conspicuously for COCO, IV is much higher for the deep in-the-money direction – that is, the lower strike prices – than it is for the far out-the-money (OTM) direction. Technically, it appears that traders are hedging for significant downside risk.

In the near term, options flow data – which filters for big block trades likely made by institutions – point to heavy sold call volume. Thus, COCO might be a name to avoid based on unusual options activity.

Digital Realty Trust (DLR)

Another entity that seemingly doesn’t appear to rank among stocks to sell, Digital Realty Trust (NYSE:DLR) is a real estate investment trust that owns, operates, and invests in carrier-neutral data centers across the world. Since the beginning of this year, DLR has gained over 20% of its equity value. And it’s been flying in the trailing six months.

However, the unusual options activity in DLR warrants serious caution. Per Fintel, Digital Realty’s volatility smile shows IV spiking higher in the deep ITM direction. In fairness, IV also rises in the far OTM direction too. Nevertheless, the delta in magnitude is gargantuan, possibly indicating that traders are mitigating tail risk (i.e. black swan event).

Most problematic in my opinion is that institutional traders appear to have bought $85 puts. Given the high IV of low-strike-price puts, traders are incentivized to sell the puts, not buy them. Think of a terrible organization like the Los Angeles Angels keeping Shohei Ohtani instead of trading him for multiple prospects.

In this case, the smart money seems convinced that DLR will fall. Therefore, I’d stay away.

Toll Brothers (TOL)

Another top-flight enterprise, homebuilder Toll Brothers (NYSE:TOL) presents a more understandable case for stocks to sell. With inflation remaining stubbornly high, fewer folks are able to afford residential real estate. Adding to the misery, the spike in borrowing costs from lifted interest rates imposes affordability woes. Unsurprisingly, TOL incurred unusual options activity.

To be sure, Toll Brothers’ volatility smile is quite telling. Yes, IV does rise higher in the extremities of far OTM strike prices. However, in the deep ITM direction, the IV lift is quite conspicuous. While I can’t make any guarantees, it appears that the smart money is protecting against both realistic downside possibilities as well as outright tail risk.

Also, what’s truly problematic is that in recent sessions, options flow data shows heavy volume for transactions that have bearish implications. To me what’s alarming is the acquisition of $60 puts with an expiration date of Dec. 15, 2023. These puts have high IV relative to the far OTM options. Thus, the incentive is to sell. That institutional investors are buying the puts suggests a high conviction of incoming downside.

PNC Financial (PNC)

Occupying the gap between a true regional and national bank, PNC Financial (NYSE:PNC) represents one of the stocks to sell that’s not so surprising to see on this list. Of course, earlier this year, the regional banking crisis sent a shockwave to the system. And questions still linger about broader stability in the sector.

Still, when looking at the underlying options dynamic, one can’t help but feel a little bit concerned. For one thing, PNC’s volatility smile shows heightened IV at both ends of the pricing extreme. However, the magnitude of IV is far higher at the lower strike price range compared to the countervailing range. Therefore, you’d expect – all other things being equal – for the smart money to sell options rather than buy them.

However, the most recent transaction in PNC’s options flow screener shows an acquisition of puts, specifically the $123 puts which expire on Oct. 6 of this year. That might be a high-conviction negative trade as again, the incentive really is to sell derivative contracts. Thus, PNC should be on your watch list based on unusual options activity.

VMware (VMW)

An American cloud computing and virtualization technology firm, VMware (NYSE:VMW) is an intriguing enterprise. At the same time, the tech sector overall has been rather unpredictable, raising the specter of stocks to sell. However, VMW easily defied gravity, gaining over 35% since the start of the year. In the past 365 days, it’s up almost 40%.

Still, it’s not out of the realm of possibility for VMware to suffer a shift in sentiment. Looking at its volatility smile, the underlying IV trend is all over the map. Still, the main takeaway is that IV is generally elevated at the strike price extremes. However, the magnitude of moving toward the deep ITM direction implies risk mitigation among smart money traders.

Further, even with IV elevated, institutional investors appear to be buying put options. Specifically, big block trades have been place for $110 puts with an expiration of Jan. 19, 2024. Per Fintel, the IV for this contract is much more elevated than usual at 1.8. Nevertheless, the institutions are buying the puts, not selling them and collecting the premium. It’s possible we could have another high-conviction pessimistic trade, making VMW another one to watch based on unusual options activity.

American Eagle Outfitters (AEO)

At first blush, American Eagle Outfitters (NYSE:AEO) doesn’t seem like an enterprise to sell. It’s been one of the strong performers recently, with shares up over 24% in the trailing six months. Since the beginning of the year, AEO returned just under 10%. However, the questions about the viability of the consumer economy cast a cloud over the fashion apparel retailer.

Turning to its volatility smile, IV gradually rises in the far OTM direction, which is perfectly normal. However, IV veritably skyrockets in the deep ITM direction, posing concerns for would-be speculators in the open market. Basically, it seems that smart money recognizes the extreme volatility risk of AEO. That’s not shocking considering that in the trailing five years, shares tumbled nearly 36%.

However, what’s really eye-opening is that throughout this month, options flow data shows significant volume for bought puts at various strike prices. Again, with IV elevated at the extremes, the pros would be incentivized to sell options. Naturally, the buying of puts (an unusual options activity) makes AEO questionable.

Abercrombie & Fitch (ANF)

Perhaps one of the most intriguing ideas to red flag based on unusual options activity, apparel retailer Abercrombie & Fitch (NYSE:ANF) has enjoyed enormous success this year. Since the beginning of this year, ANF shot up over 126%. In the trailing one-year period, shares returned nearly 222%. At first glance, it’s not the type of idea that belongs on a list of stocks to sell.

However, it’s always possible that sentiment can shift, especially as prolonged pressures like inflation weigh on discretionary consumer spending. Still, ANF’s volatility smile offers a fairly wild profile. Toward the far OTM direction, IV peaks at 0.65 at the $80 strike price. On the flip side, toward the deep ITM direction, IV clocks in at 0.75 at the $35 strike.

It’s possible that the smart money recognizes both ANF’s upside potential (as evidenced by its strong showing this year) as well as its downside risk. Interestingly, the most recent entry in ANF’s options flow screener was for the sale of $55 calls expiring on Sept. 15. Ultimately, with the security having jumped so high, it might be more prudent to trim exposure.

On the date of publication, Josh Enomoto 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.