Shares of Netflix (NASDAQ: NFLX) saw some unusual options activity on Tuesday. Following the unusual option alert, the stock price moved down to $494.
- Sentiment: BEARISH
- Option Type: TRADE
- Trade Type: CALL
- Expiration Date: 2020-07-24
- Strike Price: $560.00
- Volume: 789
- Open Interest: 1609
3 Indications of Unusual Option Activity
One way option activity can be considered unusual is when volume is exceptionally high. The volume of options activity refers to the number of shares contracts traded for a day. Open interest describes unsettled contracts that have been traded but not closed by a counter-party. In other words, for each contract buyer, there must be a seller. A purchased contract remains open until a seller closes it, and vice versa.
Another gauge of unusual option activity is a contract with an expiration date in the distant future. Additional time until a contract expires generally increases the potential for it to grow its time value and reach its strike price. It is important to consider time value because it represents the difference between the strike price and the value of the underlying asset.
“Out of the money” contracts are unusual because they are purchased with a strike price far from the underlying asset price. “Out of the money” occurs when the underlying price is under the strike price on a call option, or above the strike price on a put option. Buyers and sellers try to take advantage of a large profit margin in these instances because they are expecting the value of the underlying asset to change dramatically in the future.
Bullish and Bearish Sentiments
- Options are “bullish” when a call is purchased at/near ask price or a put is bought at/near bid price
- Options are “bearish” when a call is purchased at/near bid price or a put is bought at/near ask price
These observations are made without knowing the investor’s true intent by purchasing these options contracts. The activity is suggestive of these strategies, but an observer cannot be sure if a bettor is playing the contract outright or if the options bettor is hedging a large underlying position in common stock. For the latter case, bullish option activity may be less meaningful than the exposure a large investor has on their short position in common stock.
Trading Options With These Strategies
Unusual options activity is an advantageous strategy that may greatly reward an investor if they are highly skilled, but for the less experienced trader, it should remain as another tool to make an educated investment decision while taking other observations into account.
For more information to understand options alerts, visit https://pro.benzinga.help/en/articles/1769505-how-do-i-understand-options-alerts
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