Although clamoring over the latest ebb and flow in the technical chart has become a favorite activity among retail investors, one of the most powerful tools you can consider is unusual options activity. Primarily, it comes down to the concept of the early warning system.
Institutional investors, hedge funds and other so-called smart money players often deploy options to take large positions in publicly traded securities. Fundamentally, this approach centers on leverage. Each option contract commands the right (but not the obligation) to buy 100 shares of the underlying security in the case of calls or sell 100 shares in the case of puts.
Subsequently, a spike in call or put volume could indicate strong conviction from sophisticated traders. Such market participants may enjoy greater knowledge of the underlying business or may have access to superior research and resources. Either way, these folks can potentially move the market, meaning that their opinions (and more to the point, convictions) carry significant weight.
Another incentive to consider stocks witnessing unusual options activity is that heightened volume for derivative contracts in many cases precede major price swings. To be sure, it’s impossible to absolutely verify the sentiment of options-related transactions: there’s a lot of guesswork involved. Nevertheless, by examining strike prices and expiration dates of major transactions, you can paint a probable narrative.
Finally, unusual options activity represents a window into a relatively rarefied air. In the open market, anyone can participate. With derivatives, the heightened complexities generally means that only a select few are engaging this arena. However, this framework offers a prime data pool, facilitating deeper analyses.
With that in mind, below are three stocks exhibiting unusual options activity that you should put on your radar.
At this point, investors may be able to pick most any gold mining stock and potentially get away with it. As Money Morning’s Chris Johnson pointed out, uncertainty regarding the markets and the economy — basically known as the fear trade — have contributed to a dramatic rise in the spot price of gold. Frankly, I don’t see this circumstance reversing anytime soon, making B2Gold (NYSEAMERICAN:BTG) an intriguing idea.
To be fair, BTG stock popped more than 9% on Monday, which in many eyes may suggest that the best move is behind it. But that’s not necessarily what yesterday’s unusual options activity implies. According to Barchart, BTG’s total options volume reached 28,636 contracts. This metric stood 451.12% above the trailing one-month average.
Moreover, call volume clocked in at 22,190 contracts versus put volume of 6,446, leading to a put/call volume ratio of 0.29. On surface level, a sub-1 ratio indicates greater engagement of calls than puts, which is “good.” Still, we need more information to make such a pronouncement.
This extra data comes in the form of options flow — a screener that focuses exclusively on big block transactions likely placed by institutional investors. On Monday, Barchart reported that net trade sentiment for B2Gold landed at $100,800, favoring the bulls. Therefore, it’s my opinion that the aforementioned put/call ratio could be interpreted at face value.
Further, the alpha dogs are buying out-the-money calls that expire in October this year and beyond. These transactions imply rather strongly that BTG stock has more room to run.
One of the more intriguing — and perhaps contentious — ideas to consider for stocks exhibiting unusual options activity is Southern Copper (NYSE:SCCO). Ordinarily, tough economic circumstances would seem to represent a no-go for companies specializing in industrial metals. That said, copper is a critical metal — especially for burgeoning technologies such as artificial intelligence and the blistering rise of data centers.
Indeed, industry experts warn that due to the tech sector’s ravenous consumption of copper, the key industrial metal could suffer shortages. Making matters worse is that the U.S. is locked in fierce competition with other nations, particularly adversarial ones like China. Of course, the Chinese are doing everything they can to dominate the tech race, making copper production vital.
Plus, with the Trump administration’s tariffs, Southern Copper could potentially benefit from protection against foreign rivals. Admittedly, though, this is one of the trickier ideas among unusual options activity stocks.
On Monday, total options volume for SCCO stock reached 3,928 contracts, representing a nearly 229% lift over the trailing one-month average. Call volume spiked to 3,374 contracts versus put volume of only 554. However, options flow showed sentiment at $26,900 below parity — what gives?
It’s true that quite a bit of the call volume were sold calls. Still, I’m led to believe given the relatively high strike price range between $110 and $120 that these sold calls symbolize efforts among institutional holders looking to collect income.
Besides, if SCCO stock rises to $120 per share, that’s going to be a good day in the office.
For the last idea regarding unusual options activity, investors may want to consider keeping tabs on fast-food giant Wendy’s (NASDAQ:WEN). At first glance, Wendy’s doesn’t seem to offer a compelling narrative. Over the past 52 weeks, WEN stock dropped nearly 16% of equity value, likely a victim of consumers watching their spending habits.
Still, these eateries don’t exactly represent overtly costly expenditures. As a guilty pleasure, going out to Wendy’s is relatively cheap. Therefore, it could benefit from the trade-down effect. Additionally, more and more companies are getting skeptical about remote work (though this trend doesn’t cut universally across all industries). It’s possible, then, that Wendy’s could cynically benefit from increased demand.
Looking at the unusual options activity screener, WEN stock options totaled 33,683 contracts, an increase of nearly 209% from the trailing one-month average metric. Call volume hit 23,110 contracts versus put volume of 10,573 contracts.
Looking at options flow data, net trade sentiment hit $61,800, modestly favoring the bulls. Interestingly, the most bullish transaction on Monday within the options flow screener was for sold May 16 puts with a $15 strike price. Such a wager implies that there could be a floor for WEN stock at $15. Otherwise, if WEN falls below this point, the speculators buying the puts might exercise them.
Although it’s hardly a guarantee, there’s reason to believe that a line in the sand has been drawn.
