Unusual Options Activity: How a Massive Put Options Trade Helps You Find Excellent Trade Ideas

If you're an options trader, it's important to stay up-to-date on the latest news and events that could have an impact on your trades. Recently, 16,000 put option contracts were traded one day before a company's earnings announcement. We found this Unusual Options Activity using Cheddar Flow's Options Scanner. This unusual options activity trade caused quite a stir among traders as they wondered what kind of effect this volume could have on the stock price and their trading strategies moving forward.

Let's discuss why high-volume trades in the options market can cause such a disruption in market prices and how traders can use these scenarios to find excellent trade ideas when the next smart-money trader sweeps the options book.

What is Unusual Options Activity on a Stock?

Unusual options activity is an indicator of something significant about to happen in a stock’s price. The unusually high volume of contracts traded can be indicative that some investors know more than the rest of the market, and therefore have insider knowledge or information regarding what lies ahead for this particular asset. Savvy traders often take advantage by ‘piggybacking’ these trades as they look to capitalize on any potential changes in market conditions. Trading unusual options activity is the ideal way to follow large volume (institutional flow) in any underlying stock price.

For those looking to profit from a stock going lower, shorting is an attractive option. By following unusual options activity it may be possible to identify that opportunity and take advantage of it. For example, $MGNI recently exhibited significant open interest on its 10-strike puts out on January 24 – 16,000 puts traded compared with only a 2 million volume for the underlying stock itself – which could signal there's money to be made by taking a short position on this particular equity.

[CASE STUDY] An Unusual Options Activity Trade

For options traders looking for unusual activity in the stock market, comparing the average daily volume of traded options is one tried-and-true method. It's certainly something that deserves traders' attention if one option order is the equivalent of the day's underlying volume.

Additionally, a sudden change in option prices can be an indication that something interesting may be occurring with the underlying security – prompting a further investigation to uncover potential catalysts driving price action or sentiment! Remember, when options prices go higher, that also means more uncertainty is being priced into the market so traders should position for an increase in volatility.

Watch the Expiration Date of the Trade

Big institutional trades that expire in just a few days are significantly different than trades on options contracts with longer-term expirations. When looking for unusual options activity, traders should look for trades that are within their risk parameters. In Masters in the Trading Community, we share ideas in stocks that range from $5 to $200. The sweet spot for us is between $15 to $35.

Identifying Unusual Options Activity

Unusual options call flow and activity in the stock market can be an indication of investors anticipating a major shift in price. Smart Money traders are often attempting to capitalize on this movement, which presents savvy investors with potential profit opportunities. These traders use tools like Cheddar Flow's Options Scanner, which allows traders to uncover unusual options activity and follow the smart money in real-time. Monitoring such unusual calls may be beneficial when seeking out unexpected returns from sudden catalysts over the short term.

High Relative Volume on Strike Price

Unusual options activity plays a key role in determining short-term market movement, that's why this massive stock options trade caught my eye. This options trade was remarkable due to its sheer size relative to the average daily volume of the underlying stock, with an impressive 16,000 puts traded.

Bullish Flow or Bearish Flow – Short-Term Volatility

Bullish or bearish, the stock $MGNI has seen its share price drop from $32 down to $4 yet the underlying stock volume still manages to average around $2m of stock volume every day – making the unusually large put trade even more remarkable. If those options contracts are exercised at any moment, they'd result in 1,600,000 shares of underlying stock changing hands – a huge order for any institutional trader or hedge fund demonstrating the sheer potential Unusual Options Activity can wield!

Identify unusual options activity to potentially anticipate big moves in the underlying stock. Unpacking these trades is always an interesting exercise, and should be done before traders use technical analysis or other technical indicators. High relative options volume is a significant indicator that a potentially big more is ahead.

Buy or Sell Options into an Earnings Announcement

• Capitalize on earnings volatility by following smart-money options trades
• Find high-probability trading setups waiting for big order flow
• Look for stocks with low average volume relative to options premium
• Earnings releases present a unique opportunity to profit from highly volatile stocks

Trading options around earnings report releases can be an exciting way to potentially profit from highly volatile stocks. To benefit from options trading, traders should look for options that have implied volatilities trading low relative to movement after previous earnings releases.

Stay away from short-term trades, especially day trades. Generally, recent IPOs or newer stocks have key characteristics we look for in Earnings trades. Since these stocks have released their earning reports once (or a few times) they tend to experience extreme price swings in response to a single report. The opposite would be a stock with an extremely high average volume. This particular stock is followed closely by hedge funds and institutional investors, but they are also followed by every bank and every analyst in the world. Stocks like $AAPL or $AMZN have shared earnings over 100x over the years. A stock like $MGNI is less well known.

Trading Implied Volatility Before an Earnings Announcement

Before the earnings announcement, investors have the opportunity to make informed decisions by researching current market trends and company-specific news releases. Careful consideration of both historical patterns and recent developments can help you decide where to place your bets for maximum payoffs as the markets shift based on the news. Traders should always consider the previous movement in the underlying equity when trading options into earnings. Stocks with significantly higher movement relative to the price of their options are my favorite trade idea.

The Implications of High Put-to-call Ratios

Understanding the implications of high put-to-call ratios can be a complex undertaking, but it can provide valuable insight into a stock market's overall health. Generally speaking, when there is more trading activity in puts than calls, it can signify that traders are bearish on the market and expecting downward movement. Conversely, a higher number of call options indicates optimism and potential bullishness from traders. This ratio is an especially important metric for those looking to make their own investment decisions as well as institutions monitoring real-time data to inform their investments and analysis. A deeper analysis of these ratios can not only give investors a better sense of the current stock market climate but also frame future expectations around pricing trends.

What to Do When You See Unusual Options Activity in an Options Contract?

Unusual stock activity can be a sign of misaligned market pricing – and if you spot it, now is the time to act! By “act”, I mean taking a closer look at who initiated the trade. Was it an investor buying option or selling them?

Even more important: Who was on the other side of that transaction? Market Makers usually like to stay close to the delta-neutral position; so by studying 1-minute trading charts, savvy traders can make educated guesses about what's happening in the background.

Unusual Options Activity Anticipates Stock Market Price Movement

Learn to trade unusual options activity names to see a powerful indicator of future price movements, making an educated interpretation and understanding of these activities important for any stock trader. By analyzing the options volume, put-to-call ratio, trading volume, and volatility you will be able to interpret each trade of unusual options activity with more clarity.

When 16,000 puts are bought on a low-volume stock, the implications may even mean a 25% decrease in price if market forces align. To see just how 16,000 put trades anticipated such a drop in MGNI's share price in the stock market watch the video embedded above that walks you through the process step by step. Understanding unusual options activity will give you an edge over other traders and help ensure you don't miss out on good deals or make investments at peak prices.

If you're ready to learn more about Unusual Options Activity and get a leg up on the competition, check out Masters in Trading Community.