Irrespective of your interest in the derivatives market, it’s always helpful to consider unusual options activity. Such screeners identify aberrant trades worth closer examination. No, it’s not a magic bullet — no indicator is. However, unusual options commands the advantage of revealing where the smart money may be positioned.
As well, the character of the individual transactions can reveal the underlying sentiment. For example, sold calls represent a credit-based strategy: the trader is underwriting the risk that the target security will not rise above the breakeven threshold. In exchange for this risk, the trader receives a premium. This can be interpreted as a neutral to somewhat bearish strategy.
On the other hand, if a trader outright purchases a put option, such a transaction would represent a debit-based strategy. Here, a trader pays a premium in anticipation of a specific outcome materializing. With a bought put, the underlying security must meet certain time and positional thresholds in order for the position to be profitable. It’s a much more direct form of speculation.
Moreover, little details such as volume size relative to open interest may reveal whether the trades have any conviction behind them or if they are part of the usual rebalancing noise that occurs in the derivatives space.
Lastly, unusual options activity may provide greater context but keep this in mind — they represent the consequence, not the causality. Aberrant trades tell you that significant transactional volume occurred. They don’t reveal the underlying reason for the heightened interest.
To better understand any publicly traded security, you must analyze its true demand profile. With this article, we’ll crack both the unusual options activity and the underlying meaning behind the demand. Let’s get started.
First on our list of unusual options activity is F5 Inc (NASDAQ:FFIV). A tech firm specializing in application security, multi-cloud management, online fraud prevention and other critical services, F5 has enjoyed a strong rise in its market value over the past several years. However, circumstances have been volatile since its February highs, presenting some concerns.
Nevertheless, FFIV stock represented one of the top names within Barchart’s list of unusual stock options volume. On Monday, volume reached 5,961 contracts against an open interest reading of 5,499 contracts. Further, Monday’s volume stood at a remarkable 1,227.62% higher level than the trailing one-month average. Overall, call volume clocked in at 4,156 contracts, while put volume reached 1,805 contracts.
Looking at the actual demand profile of FFIV stock — which to be technical represents a discrete event rather than a continuous signal like price — the security printed a rare “3-7” sequence: three weeks of upside interspersed with seven weeks of downside, with a net negative trajectory across the period.
The significance is that when the 3-7 sequence flashes, there’s a 59.3% chance of upside materializing in the subsequent week — which would be this week. While the tilted probabilities are enticing, there’s a catch with the risk-reward asymmetry.
Using empirical data and projecting outward, the median return under the positive pathway for FFIV stock this week is forecasted to be 0.83%, whereas the median loss under the negative pathway lands at 2.56%. Nevertheless, FFIV may be attractive for those seeking a relevant name on a discount.
A car retailing website company, TrueCar (NASDAQ:TRUE) helps customers find the best deals on a wide selection of new and used vehicles. For folks who are short on time and don’t want to deal with the typical hassles associated with the car-buying process, TrueCar can be a godsend. Unfortunately, the difficult business environment has victimized TRUE stock, rendering it almost into literal penny stock status.
Despite the extremely speculative nature of the enterprise, TRUE stock also ranked highly in terms of unusual options activity. Total volume reached 3,978 contracts against an open interest reading of 1,236 contracts, indicating (quite possibly) the opening of new positions. Also, Monday’s volume stood at 1,221.59% above the trailing one-month average metric. Interestingly, 100% of the day’s volume was allocated toward the purchase of calls.
In terms of demand, in the last 10 weeks, TRUE stock posted a 3-7 sequence: three weeks of upside interspersed with seven weeks of upside, with a negative trajectory across the period. The significance here is that when this sequence flashes, the next week’s upside odds are around 61%.
To be fair, the risk is asymmetrically unfavorable, with the median return under the positive pathway coming in at 4.33%, whereas the median loss under the negative pathway is 6.59%. Still, the 3-7 sequence has historically acted as a pivot point, making TRUE stock a must-watch item for speculators.
Admittedly one of the more disappointing penny stocks on this list of securities pinging unusual options activity, Wolfspeed (NYSE:WOLF) on the surface should perform well. As a developer and manufacturer of wide-bandgap semiconductors, particularly focused on silicon carbide and gallium nitride materials, Wolfspeed brings much relevance toward the transportation and power supply sectors. WOLF stock just hasn’t been the most cooperative.
However, the winds may be shifting. On Monday, WOLF stock popped more than 26%, a huge windfall for recent speculators. Over the past five sessions, the security gained nearly 61%, an utterly remarkable performance. Unsurprisingly, options activity was robust, with volume landing at 151,368 contracts against an open interest reading of over 963,000.
From a demand perspective, WOLF stock printed a 7-3 sequence in the last 10 weeks: seven weeks of upside mixed with three weeks of downside, with a net downward trajectory across the period. This sequence historically yields a 58.33% upside probability in the subsequent week. Therefore, even with the already-stunning performance, WOLF may have some more left in the tank.
Again, the problem, though, is risk-reward asymmetry, with the positive pathway’s projected median return landing at 3.25%, whereas the forecasted median loss sits at 4.96%. Still, for extreme gamblers, the reversal signal may be too enticing to pass up.
