Regardless of your desire to trade options, monitoring unusual options activity — if the screener is available for your security of choice — is always a useful exercise. Primarily, large transactions in the derivatives market may signal what the smart money may be thinking. At the same time, unusual options isn’t the end-all, be-all: smart traders can make mistakes and the transactions themselves don’t necessarily offer a reliable framework for predictability.
As a trader, you’re not necessarily focused on the “why” of an asset or enterprise; instead, you’re focused on the “how” — how much, how fast, how likely. In other words, your world revolves around probabilities. Still, there are mathematical nuances to consider before engaging this realm.
For most practical applications, two types of probabilities exist: derivative and conditional. Before you purchase a trading platform subscription, you must ask the provider what type of probabilities they incorporate in their analyses. If the service provider waffles on the answer — or worse yet, doesn’t know — there’s a pretty good chance you’re dealing with a scam.
In finance, the most common probability matrix (if one is used at all) is derivative. This process involves calculating the odds of an outcome based on the entire distribution of the dataset. In baseball terms, derivative probabilities is the equivalent of a batting average over the entire season. Conditional, on the other hand, involves calculating odds based on a specific data subset. Colloquially, it’s the batting average involving RISP (runners in scoring position).
The problem in finance is that most analysts attempt to gauge price patterns or valuation targets based on floating metrics; that is, continuous scalar signals that fluctuate — often wildly — across time and context.
Instead, to facilitate conditional probabilistic analysis, one must apply discretization: the mathematical process of categorizing observable metrics into defined, discrete states. Such states — such as market breadth — are binary (as opposed to continuous), thus allowing categorization and quantification.
Through this data compression, it’s now possible to calculate conditional probabilities — how a stock performs in the clutch. With the framework established, let’s take a look at statistically intriguing securities generating unusual options activity.
Shares of United Natural Foods (NYSE:UNFI) have been badly rattled, losing roughly 23% in the past five sessions. Not surprisingly, UNFI stock caught the attention of derivative market traders. According to Barchart’s screener for unusual options activity, UNFI saw 5,873 contracts traded on Friday, representing a lift of over 151% against the trailing one-month average. Interestingly, call volume stood at 4,757 contracts, while put volume weas only 1,116 contracts.
Unfortunately, options flow data — which focuses exclusively on big block transactions likely placed by institutional investors — revealed that net trade sentiment was $27,500 below parity, thus favoring the bears. The pessimism isn’t particularly shocking given the broader economic and geopolitical context. Still, the smart money might be wrong.
In the past two months, UNFI stock printed a 6-4-D market breadth sequence: six up weeks, four down weeks, with a net negative trajectory across the 10-week period. In 64.44% of cases, the following week’s price action results in upside, with a median return of 3.14%. As a baseline, the chance that a long position in UNFI will be profitable over any given week is 53.48%.
On Friday, UNFI closed at $21.30. If the implications of the 6-4-D pan out, the security could pop to nearly $22 within a week or two. Should the bulls maintain control of the market, UNFI could reach a range between $22.30 and $22.50 over the next three weeks.
On paper, Clorox (NYSE:CLX) is a rather boring name. Even worse, CLX stock has a high-risk profile. Since the start of the year, the security plunged more than 24%. Over the past 52 weeks, it’s down nearly 8%, reflecting conspicuous underperformance relative to benchmark indices. Still, it too caught the eye of traders.
On Friday, CLX represented one of the top names generating unusual options activity. Total options volume hit 5,543 contracts, a 159% lift over the trailing one-month average. Further, call volume was 3,013 contracts, while put volume was 2,530 contracts, producing a put/call ratio of 0.84.
In contrast to UNFI though, options flow data for CLX stock was positive, with net trade sentiment reaching $770,900 above parity. Here, the transactions with the highest dollar volume were for sold puts expiring July 18 of this year. This credit-based trade may reflect confidence that, at worst, CLX’s downside trajectory will abate.
In the past 10 weeks, CLX printed a 3-7-D sequence: three up weeks, seven down weeks, with a net negative trajectory. However, in 61.29% of cases, the following week’s price action results in upside, with a median return of 1.41%. As a baseline, the chance of one-week upside is 52.75%.
Should the implications pan out, CLX is on course to reach around $124.81 quickly. Over the next four weeks, if the bulls maintain control, the security could exceed $127.
With tensions between President Donald Trump and Tesla (NASDAQ:TSLA) CEO Elon Musk apparently cooling off, TSLA stock can get back to its normal trajectory. Last week, the equity tanked amid an ugly falling out between the two titans. However, with TSLA gaining nearly 14% in the trailing five sessions, it would seem that the volatility was artificial and unnecessary.
Whatever the case, TSLA was also a contributor to unusual options activity. On Friday, total options volume hit over 4.64 million contracts, representing a 63% lift over the one-month average. Call volume stood at almost 2.57 million, while put volume reached more than 2.07 million, yielding a put/call ratio of 0.81.
Unfortunately for the optimists, options flow was decidedly negative, with net trade sentiment falling to more than $3.8 million below parity. The most aggressive trade was for $2.425 million worth of sold calls expiring this coming Friday. While that’s not necessarily encouraging, the good news is that a significant chunk of bearish overhand may be eliminated soon.
Also, keep in mind that TSLA stock printed a 6-4-U sequence in the past 10 weeks. In 65.62% of cases, the following week’s price action results in upside, with a median return of 4.01%. With TSLA closing at $325.31 on Friday, it’s possible that the bulls could drive the equity to $338.35. As a baseline, the chance of long-side profitability over a one-week period is 53.66%.
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