Welcome to Unusual Options Activity!
Even though last week was a short trading week, the market was on the move with the Dow Jones Industrial Average and S&P 500 Index hitting their fourth straight down day on Thursday. Both fell about 2% on the week.
To be clear, I think this is a slight moment of weakness for the market. I don’t anticipate the selling pressure to last for too long. And futures are pointing to a higher open this morning, with each major index about half a percent higher.
Even so, I love watching how the big money options traders play this type of market.
With more gradual down moves like this, the reactions are more mixed. Some are diving in with calls to take advantage of a bounce, while others are expecting more weakness and piling on with puts.
So today we’ll look at trades from each camp — two bullish and two bearish — to help take advantage of the latest market swings.
Let’s dive in…
The Bulls Are Playing Trend Channels
Since I’m bullish in general, let’s start with our bullish options action.
First up is a $184,000 bet on The Bank of New York Mellon Corporation (NYSE: BK). We’ve seen plenty of options activity on banking stocks over the past few months and traders are still bullish.
This one trader purchased 2,300 of the October 15, 2021 $55 calls for about $0.80. They need the stock to rise 5% just to hit breakeven, but the beautiful thing about options is that they only need another 1% to 6% move to hit a triple-digit gain and double their $184,000.
Shares of BK had dropped 6.5% over just a couple of weeks before this trader pulled the trigger.
They saw the dip, looked at it as an opportunity, and are now looking for a quick profit over the next month as the stock recovers.
Let’s take a look at the chart…
BK is in a pretty clear uptrend, and just recently came close to the lower support line of that trend. If it revisits the red resistance line anytime soon, this trader will make out with a nice profit.
Our other bullish trade is a $660,000 bet on The RealReal (Nasdaq: REAL), an online marketplace for used luxury goods.
They grabbed 5,500 of the October 15, 2021 $12.50 call options for about $1.20.
Instead of trying to time a bottom, though, this trader jumped in as the stock popped 6%.
No news was showing up, but it did look like a clean technical break on its price chart. It was trading in a sharp downtrend, but the 6% pop broke that red resistance level. Here’s the chart…
This points to more gains in the weeks ahead, and that’s exactly what this trader wants to capitalize on with their at-the-money call options.
Now let’s switch gears because there was plenty of bearish action…
The Bears Can’t Stay Away From Descending Triangles
We saw a modest bet of $93,000 on gold stock, Alamos Gold (NYSE: AGI), to drop by October.
They scooped up 3,114 AGI October 15, 2021 $7.50 puts for about $0.30 while the stock was trading at $7.60. This one is riding on a potential breakdown of a descending triangle pattern.
There’s no breakout yet… but watch for the stock to dip below that green support level.
That’s what this trader is betting on and it’s how they’d see a significant gain on their trade.
Our last unusual options trade for the week is the biggest bet yet on Li Auto (Nasdaq: LI).
One trader bought just over 5,000 contracts of the October 15, 2021 $30 put options for $2 — a million-dollar trade.
With this one, we have another descending triangle pattern with the trader looking for a downside breakout. Check out the chart…
But for this one, it’s important to note that the trader doesn’t even need that downside breakout. Even just a drop back to the bottom of the pattern would deliver a nice double-digit gain for the trader.
If it breaks out below that green support line, then their early bet on a breakout would really pay off.
That’s a wrap for today’s unusual options activity.
Remember, these traders putting up big bucks have the big money to spend. It’s not likely they’re betting their whole brokerage account.
They will be wrong about as many times as they end up being right. And with options, where your risk is clearly defined and your winners tend to outweigh your losers, this is a sound strategy even with a 50-50 success rate.
But when they are right, they can be right big time. And that’s why we track these trades each week.
Editor, Quick Hit Profits
Chart of the Day:
A Technical Value Play?
By Mike Merson, Managing Editor, True Options Masters
Today we have an unusual situation where a stock looks good technically… and fundamentally.
We’re looking at Cars.com (NYSE: CARS) an online used vehicle retailer.
What I first noticed about Cars.com is how relatively cheaply priced it is to its peer Carvana (NYSE: CVNA). While Cars.com can’t be considered anywhere near “cheap” with its price-to-earnings ratio of 147, it at least has earnings. CVNA, by comparison, boasts a negative P/E ratio in the triple digits.
So why this huge difference in premium? It could be chalked up to the fact that Carvana allows its users to sell their cars online, and Cars.com doesn’t — for now. It’s reportedly working on adding that feature soon.
Whether that will attract more long-term investment is hard to say. But for the short term, the chart for CARS looks interesting for a long setup.
The two yellow lines in the chart above are a key accumulation zone for CARS. That’s where buyers have stepped in for much of the past year to scoop up shares. It’s a strong support line.
We’re also seeing a series of lower highs heading toward that support, with positive divergence on the RSI and MACD indicators. While descending triangles tend to be a bearish pattern, the strong support at the $11-$12 level and its recent behavior with this pattern have me leaning bullish on CARS for the short term.
Managing Editor, True Options Masters