Investors seeking an edge in the market should turn to unusual options activity for potential clues. As largely the domain of professional and institutional investors, the derivatives market may help identify big moves before they happen. Further, by studying the nature of the transactions — whether most of the dollar volume centers on debit or credit-based strategies — one can get an idea of the magnitude of conviction.
That said, unusual options activity doesn’t represent the end-all, be-all of market behaviors. Primarily, you don’t know the full trade. Therefore, a massive position of 20,000 call options might be part of a spread (like a ratio spread or calendar). Additionally, sophisticated traders could be buying those calls to hedge a short position in the underlying security. Or, it could simply be a volatility play, not necessarily a directional wager.
By only seeing the tip of the iceberg, a retail trader risks overcommitting capital based on incomplete data. Secondly, it’s worth pointing out the obvious: the smart money may be sophisticated but it’s not infallible. Even the best traders make mistakes. The thing is, the pros typically have the resources to absorb mistakes but the retail participants might not.
As such, I believe there’s great benefit in filtering out the most probabilistically compelling transactions within the list of unusual options activity. Rather than focusing purely on what the big dogs are doing, I’m instead choosing to discretize price discovery into sequences of accumulation and distribution. In this manner, I’m able to apply Markovian principles, determining the probability of transition from one behavioral state to another.
Yes, it requires a ton of data analysis — but that’s what artificial intelligence is for. With that, let’s take a look at compelling trades from the options market.
Since the beginning of the year, Boston Scientific (NYSE:BSX) has easily outpaced the benchmark index, gaining over 14%. In contrast, the S&P 500 moved up only 2%. Earlier, concerns existed about the impact of President Donald Trump’s tariffs on its medtech business. Since then, the U.S. and China have agreed to cut bilateral tariffs by 115 percentage points. Subsequently, the fundamentals seem encouraging for BSX stock.
On Friday, Boston Scientific was one of the top highlights in Barchart’s unusual options volume screener. Total derivatives volume reached 20,398 contracts, representing a 104.1% lift over the trailing one-month average. Further, call volume hit 12,220 contracts versus put volume of only 8,178 contracts. On paper, the put/call ratio of 0.67 seemingly implies optimism.
However, options flow — which focuses exclusively on big block transactions likely placed by institutional investors — showed pessimism, with net trade sentiment slipping to $512,900 below parity. Still, the biggest transaction was for $330,000 worth of sold calls, which is a credit-based transaction. Therefore, sentiment may be mildly bearish instead of overtly.
In either case, what’s interesting about BSX stock is that, in the past two months, it printed a 4-6-U market breadth sequence: four up weeks, six down weeks, with a net positive trajectory across the 10-week period. In 65.38% of cases, the following week’s price action results in upside, with a median return of 1.79%.
As a baseline, the chance of a long position being profitable in BSX stock on any given week is 56.8%. Therefore, bullish speculators are getting 7.49 percentage points of free odds in their favor.
Recently, Veeva Systems (NYSE:VEEV) — a cloud-computing enterprise focused on pharmaceutical and life sciences industry applications — has been generating considerable buzz. Since the start of the year, VEEV stock gained almost 36%. Much of this enthusiasm came within the trailing month, with VEEV moving up over 19%.
Zacks Equity Research dug into the unusual options activity undergirding Veeva, noting the possibility of big move transpiring. On Friday, VEEV triggered the aberrant volume screener, with total options volume hitting 26,588 contracts, representing a lift of 399.21% over the trailing one-month average. Further, call volume was 25,525 versus pout volume of 1,063, yielding a put/call ratio of 0.04.
On the day, options flow was mildly positive, with net trade sentiment reaching $51,600 above parity, thus favoring the bulls. Quantitative signals also confirm that the smart money could be sniffing an opportunity.
In the past two months, VEEV stock printed a 7-3-U sequence: seven up weeks, three down weeks, with a net negative trajectory across the 10-week period. In 58.9% of cases, the following week’s price action results in upside, with a median return of 2.71%. Should the bulls maintain control of the market, it’s possible that, within a two-week frame, VEEV can hit $296.
As a baseline, the chance that VEEV stock will rise on any given week is 57.17%. Therefore, the bulls have a small but noticeable edge.
Gold and especially silver is having a moment, which naturally puts the spotlight on Wheaton Precious Metals (NYSE:WPM). To be blunt, while the silver price has rocketed to multi-year highs recently, many if not most miners in the space simply stink. It’s not that their operations are poor; rather, the market valuation fluctuates violently.
While Wheaton isn’t exactly immune to the volatility found in the precious metals space, it mitigates some of the wildness thanks to its streaming business. Rather than directly mining the commodities, Wheaton provides upfront capital to mining enterprises. In exchange, it receives an agreed-upon portion of the resources extracted. Subsequently, the streaming company enjoys a level of predictability not often found in pure-play miners.
At the end of last week, WPM stock represented one of the highlights in terms of unusual options activity. Total volume hit 6,753 contracts, representing a 46.36% lift over the trailing one-month average. Call volume was 3,330 contracts, while put volume was 3,423 contracts, yielding a put/call ratio of 1.03.
However, options flow revealed that net trade sentiment on Friday was $152,100 above parity, thus favoring the bulls. This demonstrates that investors shouldn’t immediately rush to judgment based on any single metric.
In the past two months, WPM stock printed a 6-4-U sequence. In 56.32% of cases, the following week’s price action results in upside, with a median return of 2.54%. If the bulls maintain control of the market, WPM could potentially push toward the $92 to $95 range over the next four weeks.
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