Unusual Options Activity: Simple Trades, High Odds, Big Potential

“The trend is your friend.”

You’ll hear me and Mike say that a lot. I think he likes to add, “until it’s not.”

What he means is you can only ride a trend until it breaks. Then you have to adapt.

This can be frustrating for traders, especially ones that like to be contrarian.

Because often, the best move to make is the simplest one.

And you don’t have to look far to confirm this is true. When you follow the smart money in the market — those throwing around millions on straight-cash bets — often they’re looking to simply go with the trend.

Simple trades, high odds, big profit potential. That’s what people with deep pockets want. Not to call tops or bottoms and look smart for doing so.

Last week, I highlighted three bullish trades that had unusual options activity. Each one was simply riding the trends.

We’re sticking with that idea this week. But instead of a bullish bet, we have one stock that’s seeing a large volume of bearish bets.

Once again, traders are simply following the stock’s trend. And with the stock’s recent price action, their bearish stance has been confirmed… and emboldened.

A Big Bet on a Clear Downtrend

Last Thursday, computer storage company Micron Technology (Nasdaq: MU) shares sank 6%. The chip stock fell on the news of an analyst downgrade.

Billions in value wiped out. From a basic investment downgrade.

These analyst ratings are commonplace on Wall Street. They rarely move a stock like this.

This time it did.

And it caused the stock to break below a key support…

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Note the channel that MU has been in since early May. It’s a series of lower highs and lower lows. Textbook downtrend.

Then, Friday’s price action sent it even lower, out of the channel.

But what really caught my attention was how the big money jumped in.

My options scanner showed traders were rolling forward some shorter-dated put options, bailing on their call options, and adding even more put options.

There’s over $1 million in unusual options activity on the August 27, 2021 $65 and $69 put options…

Another $817,000 that popped up for the September 17, 2021 $70 put options…

And then a whopping $3.8 million bearish bet on the June 17, 2022 $65 puts.

This is some serious coin laid down on the stock to continue lower.

And you can see on the chart, these traders aren’t trying to call a top, or expecting a sharp reversal after a big run. The stock is down 15% just this month, and down more than 25% since April.

They are letting the trend be their friend as they look for the stock to see more selling pressure in the months ahead.

But that wasn’t the only unusual activity I spotted last week…

Higher Risk, Higher Reward

These next three trades aren’t as clearly “trend-following” trades as the others. The stocks have all basically languished and chopped around for the past six months.

Unlike our first few trades, these traders are betting on major trend changes. A less likely, but potentially far more rewarding, bet to make.

I also saw a $1.1 million bet on Home Depot (NYSE: HD) to drop this week, with 2,000 of the August 20, 2021 $335 put options.

And a $1.7 million trade on Lyft (Nasdaq: LYFT) to “lift off” over the next two months, with 5,000 of the October 15, 2021 $55 calls for $3.45.

Finally, there’s a risky, but potentially very rewarding earnings play that popped up.

A trader bought over $250,000 on some deep out-of-the-money calls for Macy’s (NYSE: M). The brick-and-mortar retailer is set to report earnings later this week.

And those options, which traded for just $0.18 for the $23 calls, expire this Friday.

Most likely they’ll expire worthless, but at least one trader sees the potential for a big move that could deliver a huge payday.

Regards,

Chad Shoop