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Snap's Large Option Trading Volume Suggests Institutions Might Be Getting Involved

Wayne Duggan

Shares of Snap Inc (NYSE: SNAP) are up 17.7 percent over the past week after analysts praised the company for making major strides on its user growth.

The stock traded higher by another 1.1 percent on Friday, but some unusually large option trade on Friday morning could suggest a trader with deep pockets believes Snap stock has risen too far too fast.

Whether or not the Snap rally has legs, a series of large Snap option trades throughout the week suggests the company once again has option traders’ attention.

The Trades

On Friday morning, Benzinga Pro subscribers received three options alerts related to Snap.

At 10:12 a.m., a trader sold 2,500 Snap call options at a $15 strike price that expire on August 16. The calls were sold at the bid price of $1.011 and represent an $252,750 bearish bet on Snap shares.

The next large trade came about three minutes later. Likely the same trader sold another 2,500 of the same August $15 Snap call options at the bid price of $1.021. Together, two sales represented a $508,000 bearish bet on Snap.

At around 1:00 p.m., a trader sold another 1,250 Snap October 19 call options at a $19 strike price. The calls were sold at the bid price of 48 cents and represent an additional $60,000 bearish bet against Snap.

Looking back at the entire week, Snap experienced heavy option trading for several days in a row.

Benzinga Pro reported 58 unusually large Snap option trades since the market opened on Tuesday. Of those 58 trades, roughly two-thirds of the trades were either call sales at the bid (36) or put buys at the ask (2), both considered to be bearish volume. Only 36 percent of trades were call buys at the ask (19) or put sales at the bid (1). Since around 3:00 p.m. on Thursday, the last nine consecutive unusually large Snap option trades have been bearish call sales at or near the bid price.

Why It’s Important

Due to the relatively complex nature of the options market, options traders are generally considered to be more sophisticated than the average stock trader. In addition, large options traders are often professional, wealthy individuals or institutions, either of which could have unique insight or information about a company. Even traders that stick exclusively to stocks watch the option market closely for unusual trading activity as an indicator of where the “smart money” is focusing.

Unfortunately, because stock investors often use put options to hedge larger bullish stock positions, there’s no way to be 100 percent certain whether an option trade is a standalone purchase or a hedge against a stock position. Given there were so many large Snap option trades throughout the week, there’s a good chance at least some of them were institutional hedges, suggesting all the call selling may not be as bearish as it seems.

John Fazio, CIO of Third Wave Capital, told Benzinga on Friday he's anticipating some big numbers from Snap in coming quarters.

"Snap’s IPO was a short to me because they overestimated adoption. However since the IPO, they've done a great job building an ad revenue model that doesn't turn off the younger generations. We see Snapchats adoption and revenues growing significantly through year end,” Fazio said.

If other institutional investors are as bullish as Fazio, they could easily be accumulating large long positions in Snap stock and selling puts against those positions this week as a hedge.

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