I just recently hosted a webinar, where I went over what is unusual option activity and why I feel every options trader should follow it. The quick answer to the why, is that to me this is as close to a “real time” trading indicator than anything else out there. Money being put at risk is different than someone coming on TV saying they “like” the stock. I go back to the school of thought of follow the money and I will show you why following the money paid of in American Axle Manufacturing Holdings (AXL).
On November 11, 2010 I noted unusual buyers coming into the November $11 calls, where 5472 contracts traded that day with an open interest of 1,394 contracts. Pretty obvious buyers where coming in with trades hitting the offer (indication of buyers) at 10 cents and implied volatility moving higher by 16%. Here are a few reasons why this is unusual.
1) Market was very bearish that day, with the S&P 500 closing down 1.56%
2) Shares of American Axle closed down 4.15% closing at $10.39
3) Call buyers coming into November calls with three days to expire
4) The options trading activity was 3x the normal amount of options traded during the last 22 days
If this does not make sense, I will break it down. The traders paid $10 for each option contract to control 100 shares of (AXL) stock at $11 before November expiration. The total amount of money put up yesterday was $54,000 for this trade. This is not to much money, but here’s the thing, they only had three days to be right so they were risking $54,000 for an all or nothing trade. With the market and shares that weak, what could they be possibly betting for, a bounce?
Well shares did bounce the next day, a good 7.31% with shares currently trading at $11.15 as I write this. The reason for the bounce? JPMorgan Chase (JPM) came out before the market open with an Upgrade on shares to an Overweight from Neutral, while raising their target price to $14.
Pretty interesting, that less than 24 hours before there were buyers of calls to own shares above $11. Currently the price of those November $11 calls are trading at $.30x$.35, a 200% gain on the trade. So do you think this was lucky or someone knew ahead of the rest of us? Leave a comment below.
Here is what I provided to my members in my live chat room: (click to enlarge)
Josh, Great call. How did the option action come to your attention?
Marty, I go over why how it got my attention above.