Snap (NYSE: SNAP) shares experienced unusual options activity on Tuesday. The stock price moved down to $24.62 following the option alert.
- Sentiment: BEARISH
- Option Type: SWEEP
- Trade Type: CALL
- Expiration Date: 2020-08-21
- Strike Price: $25.00
- Volume: 2783
- Open Interest: 28413
3 Ways Option Activity is ‘Unusual’
Extraordinarily large volume is one indication of unusual option activity. Volume refers to the total shares contracts traded in a day when discussing options activity. Unsettled contracts that have been traded, but not yet closed, are called open interest. These contracts are not closed because a buyer has not purchased a contract, or a seller has not sold it.
A contract with an expiration date in the distant future is another tell of unusual activity. Generally, additional time until a contract expires increases the potential for it to reach its strike price and grow its time value. Time value is important in this context because it represents the difference between the strike price and the value of the underlying asset.
Contracts with a strike price far from the underlying price are also considered unusual because they are defined as being “out of the money”. This occurs when the underlying price is under the strike price on a call option, or above the strike price on a put option. These trades are made because the underlying asset value is expected to change dramatically in the future, and the buyer or seller can take advantage of a greater profit margin.
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
Although the activity is suggestive of these strategies, these observations are made without knowing the investor’s true intentions when purchasing these options contracts. An observer cannot be sure if the bettor is playing the contract outright or if they’re hedging a large underlying position in a common stock. For the latter case, the exposure a large investor has on their short position in common stock may be more meaningful than bullish option activity.
Using These Options 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
© 2020 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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