Friday the actions of Wholesale Costco (NASDAQ: COST) experienced unusual options activity. After the option alert, the stock price rose to $ 412.48.
- Feeling: KISS
- Option type: SCAN
- Type of business: APPEL
- Expiration date: 2021-07-16
- Exercise price: $ 410.00
- Volume: 296
- Open interest: 1414
Three signs of unusual options activity
Unusually large volume (compared to historical averages) is one reason why options market activity can be considered unusual. Option activity volume refers to the number of contracts traded over a period of time. The number of contracts that have been traded, but not yet closed by either counterparty, is called open interest. A contract cannot be considered closed until there is both a buyer and a seller for it.
Another indicator of unusual activity on options is the negotiation of a contract with an expiration date in the distant future. The extra time until a contract expires usually increases the potential for it to increase its time value and reach its strike price. It is important to consider the 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 bought with a strike price that is far from the price of the underlying asset. âOut of the moneyâ occurs when the underlying price is less than the strike price of a call option or greater than the strike price of a put option. Both buyers and sellers try to take advantage of a large profit margin in these cases, as they expect the value of the underlying asset to change drastically in the future.
Bullish and bearish feelings
Options are âbullishâ when a call is bought at / near the ask price or a put is sold at / near the bid price. Options are âbearishâ when a call is sold at / near the bid price or a put is bought at / near the ask price.
Although the activity is suggestive of these strategies, these observations are made without knowing the true intentions of the investor when purchasing these options contracts. An observer cannot know for sure whether the bettor is playing the contract up front or whether he is hedging a large underlying position in a common stock. In the latter case, a large investor’s exposure to their short position in common stocks may be more significant than bullish options activity.
Use these option strategies
Unusual options activity is a profitable strategy that can greatly reward an investor if they are highly skilled, but for the less experienced trader, it should remain another tool for making an informed investment decision while taking into account other observations.
For more information on option alerts, visit https://pro.benzinga.help/en/articles/1769505-how-do-i-understand-options-alerts