A Perfect Example Of Unusual Call Option Activity!

| March 2, 2015 | 0 Comments

inflows/outflowsA Perfectly Unusual Call Option Trade!

As you know, we’ve been discussing basic concepts every option trader should know.  My last article on the subject covered open interest and its effect on bid/ask spreads.

I also clued you in on a hot options tip…

When daily trading volume in a particular option strike is well above the previous day’s open interest, you should sit up in your chair and take notice.

Why?

It’s a great clue to the future direction of the underlying stock or commodity ETF.

Using unusual option activity, you can get long (or in some case, short) the asset in question via common stock or the options market.

Let me show you a real life example of unusual options activity that occurred late last week…

A Big Call Option Trade In GLD

As you may know, February was a rather lackluster month for gold.  The commodity ended the month down 6.2%.

But if you look at a chart, you’ll find something interesting…

Unusual call option activity, a chart of gold

As you can see, the yellow metal is falling towards two forms of technical support.  First we have the $1,200 an ounce level (red line), which investors are already acting positively to.

Secondly, the resistance trend line (green line) that gold broke above in early January is now a form of technical support.   It lies at the $1,800 area.

These important support levels may be why a well-heeled investor bought 18,000 September 2015 $150 strike calls of the SPDR Gold Trust Shares (GLD) last Thursday.

As you’re likely aware, GLD is a highly popular commodity ETF that tracks the price of gold.  If the yellow metal rises, so will GLD.

Now listen closely…

The open interest on the September $150 calls before the big trade was nearly zero.  That’s why this trade is a perfect example of unusual options activity.  Thursday’s 18,000 contract trade far outweighed the open interest from the previous day.

Clearly, someone thinks gold will rally as 2015 progresses…

And get this.  Since those $150 calls were trading at $0.50 a contract, the purchase was worth approximately $900,000.  While that’s not the largest option trade I’ve seen, it’s a portly sum to bet on far out-of-the-money calls!

What do you do with this information?

There are a number of alternatives.

You could simply buy GLD, looking for the price to rise.  Or you could buy the exact same September $150 call contracts the trader above did.  Of course, there are hundreds of call option trades in various strikes and expirations that would be similar to this trade.

You could also choose to sit on the information and look for additional information to support it.

Just keep one thing in mind…

The trader above picked an expiration that’s seven months in the future.  That means they have a relatively long time horizon for this trade to work.  In other words, they’re patient.

But I flagged another big option trade last Thursday where the purchaser is expecting things to happen a lot more quickly…

Another Unusual Call Option Trade From Last Week

The GLD $150 call trade was the first of two unusual option trades I saw late last week.

The second one was a very unusual $2 million short-term bet on an oil company.  The options in play expire this month, so someone is expecting fireworks for the name soon!

I can’t tell you which company because I alerted my Options Profit Pipeline subscribers to it on Friday.

There’s still time to get in this trade if you act right now!

Until Next Time,

Justin Bennett

BIO:  Justin Bennett is the head commodity research analyst at Commoditytradingresearch.com.  With over a decade of real world trading experience, he finds ways for you to consistently profit from movements in commodities and the companies producing them.  Sign up for our free reports and commodity newsletter at https://commoditytradingresearch.com/free-sign-up.

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Category: Commodity Options Trading

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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