The document discusses unusual options activity as an indicator for identifying potential stock movements. It describes how analyzing large options trades, especially those that are opening new positions, can provide insight into how institutional investors and hedge funds are positioning themselves. A recent example is given of a large put purchase on Con Edison stock that preceded a downgrade and share price decline. While the reasons behind such trades can be difficult to determine, examining catalysts like news, charts, and earnings dates can provide clues to help investors incorporate unusual options activity into their research process.

2. Now, when it comes to financial television,
my favorite way to watch it is on mute. I
could care less about their opinion on the
stock market.
After all, they don’t call them talking heads
for nothing. I mean seriously, how active can
these people be in the market?

3. Don’t they have positions to monitor, ideas
to generate, research to do, trades to enter
or exit? Silly me…if they were actually doing
that, they wouldn’t have time to tell us
where they think the market is going next.
To be honest, the reason why I stopped
providing commentary to the financial
media is because it proved to be a distraction
that took away time from my trading and
clients.

4. Why would I take advice or follow someone
who has no skin in the game…someone who
has nothing to lose if they are wrong? It
makes no sense.

5. Just follow the money trail.
Even before I founded OptionSIZZLE, I’ve
always focused my attention on the real-
money players, the institutions and hedge
funds who make (or lose) fortunes from
executing their trading ideas. For me,
nothing gives an investor more information
on the future direction of a stock than
watching unusual options activity.

6. After all, they have hundreds of thousands of
dollars (sometimes multi-millions) riding on
these make or break decisions.
Now, if you don’t know, unusual options
activity is simply above average volume on a
particular stock option. What makes it so
unique, unlike watching stock order-flow, is
that we can identify if these are opening
positions (new trades).

7. How so? Simple, every option contract traded
on a stock has volume and open interest.
Now, of course, volume refers to all the options
traded on a specific stock option (strike price) on
that day, which includes options that are bought
or sold. Well, naturally, open interest refers to
all the contracts that are outstanding (open
positions that have yet to be closed out) for a
specific option contract (strike price).

8. For example, if someone buys 4000 Micron
24 calls (expiring 4/24/14), with 1000
contracts of open interest…we know for a
fact that thisis an opening position (new
trade).
However, we don’t know if the trade was
placed as a hedge against a short stock
position or if it’s speculation that the stock
trades higher.

9. Of course, trying to figure out the WHY is the
most important element…even though we’ll
never know for certain.
That’s why I’m always looking for ways to
connect the dots. Now, it doesn’t matter if
you’re an investor or trader…knowing how
the smart money is positioned is mega-
valuable information.

10. Let’s look at a recent example to see how
this all works.
On Wednesday, March 12, there was a large
put buyer in Con Edison (ED) at around 12:15
Eastern Time, when the stock was trading at
$54.59. They came in and bought 9,294 April
52.5 puts for .35 per contract.

11. At the time of the order, the bid price was .25
and the ask price was .35. The open interest
was 52 contacts.
Of course, we know that this was an opening
position because volume was greater than
open interest. In addition, we know that this
was an aggressive order because the trader
was willing to lift the offer (buy the ask price)
vs. trying to buy the options at the mid-price
(.30).

12. The order gave the trader the right (but not
obligation) to be short 929,400 shares of stock.
Now, what made this order interesting… is that
ED on average trades 983 option contracts a
day.
On Wednesday, it traded 22,670 contracts… 98%
of those contracts were puts! Again, that’s 23
times usual options volume. By the way, this
is unusual options activity at its finest. However,
we don’t know why they put this order on.

13. We’re assuming whoever put the trade on is
an informed trader…after all; they’re willing
to bet over $325k on their idea…putting their
money where their mouth is.
Again, is this speculation or a hedge? I have
series of questions that I rundown whenever
an unusual options trade interests me. Allow
me to share some with you.

14. First, is this speculation on upcoming
earnings? Probably not, their earnings are on
5/01/14…we can scratch that off the list.
Is this a hedge against a long stock position?

15. Possibly…however, I like to look at a chart to
see if the stock has been in an up or down
trend. If the stock is trending higher, they
might want to buy puts to protect their
profits and hedge.

16. Well, for one thing, the chart looks pretty
weak…it’s hard to imagine someone hedging
a long stock position with such a bearish
looking chart.
Speculation that the stock drops further vs. a
hedge makes for a more compelling
argument.
Moving on.

17. Are they presenting at a conference or have
been recently downgraded?
No and No.
You see, it’s important to have a corporate
calendar nearby in order figure this stuff out.
In addition, you should search for any related
news that could possibly give us hints on why
this large option trade went through.

18. If you don’t subscribe to any news services,
you can always use Twitter… a lot of times
they’ll break news quicker than financial
television will.
In this case, Twitter was very useful.

19. It turned out earlier in the day there was a
horrific explosion in East Harlem, New York.
Sadly, it left several people dead and injured.
First, let me say, my thoughts and prayers go out
to anyone affected by this tragic accident.
I’m still shaken up from hearing about Malaysia
Flight 370 over the weekend…hearing about this
accident in New York, only reminds me how
precious life is.

20. Now, was Con Edison at fault?
Is there a potential lawsuit in the works?
Is this why they bought these put options?
I don’t know…but it could be a potential
catalyst to drive the stock price lower.

21. Well, on Thursday, Con Edison was
downgraded at Barclays, the stock price
declined 1.7% and those put options traded
as high as .70 per contract…doubling from
where the large trader initially got in.
We were able to identify this as an aggressive
unusual options order…we’ll never know why
the trade was put on, but felt there was a
catalyst behind the order… along with a weak
looking chart.

22. At the end of the day, finding unusual option
trades is easy…trying to figure out the WHY is
always going to be the challenge. Currently,
I’ve written two reports, outlining my process
in full detail, along with providing tons of
examples for what constitutes as worthwhile
opportunities (and which ones don’t).

23. As you can see, it pays to follow those who
have skin in the game. Think about it, these
large option trades are placed by some of the
sharpest minds on the street, they probably
have an army of research analysts and access
to information we simply can’t afford to get
our hands on.
Now, I’m not advocating that you should
start trading off unusual options activity.

24. What I’m saying is that you should strongly
consider incorporating it in your research and
decision making process. As my go-to
indicator, it’s proven itself countless times.

25. To learn more about how you can use this
can’t miss indicator…
Click on the button below, don’t worry, the
report is 100% free…

26. Inside I’ll teach you how to:
Hand-pick potential big movers
Weed out the noise
Track activity using my proven method
Nail the approach down by learning from
case studies
And much, much more…