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How Do They Know?

How Do They Know?

Posted on 16 July, 2014 by admin

We define unusual option activity as large block trades that represent a large percentage of daily option volume. The block trade is considered “unusual” if the option volume is above the average daily volume over the past 22 days. Analyzing unusual order flow gives traders a window into what the positions that large institutional players have. The majority of unusual option activity can be traced back to hedge funds, mutual funds, and other large institutions. Knowing where these institutions are placing their bets can be hugely advantageous for any trader. These institutions have informational and technological advantages that the average trader doesn't have, and the amount of time and analysis that goes into every one of their trades is substantial.

On July 9th we saw an order that fit these criteria. A trader bought 3,730 TWX Oct 80 calls for $0.90. At the market open on Jul 16th the stock was up over $11 on the announcement of a takeover bid for TWX. Amid the takeover activity these calls traded as high as $6.60, a massive move higher. Let’s break down this trade.

Trade: A trader bought 3,730 TWX Oct 80 calls for $0.90
Risk: $90 per 1 lot
Reward: Unlimited
Breakeven: $80.90

Cash Outlay: $335,700
Position Value at $6.60: $2,461,800

How Do They Know?

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