Colgate-Palmolive (NYSE: CL) stocks saw unusual options activity on Wednesday. The stock price climbed to $ 83.25 following the option alert.
- Feeling: KISS
- Option type: SCAN
- Type of business: PUT
- Expiry date: 2021-08-20
- Exercise price: $ 82.50
- Volume: 304
- Open interest: 889
Three Ways Options Activity Is “Unusual”
An extraordinarily large volume (relative to historical averages) is an indication of unusual activity in the options market. Volume refers to the total number of contracts traded over a period of time when examining options market activity. Open interest is the number of unsettled contracts that have been traded but not yet closed by either counterparty. In other words, open interest represents the amount of contracts that individual parties have written but have not yet found a consideration (i.e. a buyer finding a seller or a seller finding a buyer) .
Another sign of unusual activity is negotiating a contract with an expiration date in the distant future. Usually, more time until a contract expires gives it more opportunities to reach its strike price and increase its time value. The time value is important to take into account because it represents the difference between the strike price and the value of the underlying asset.
Out-of-the-money contracts are unusual because they are bought with a strike price that is far from the price of the underlying asset. “Out of the money” occurs when the underlying price is less than the strike price of a call option or greater than the strike price of a put option. Both buyers and sellers try to take advantage of a large profit margin in these cases, as they expect the value of the underlying asset to change drastically in the future.
Bullish and bearish feelings
Options are “bullish” when a call is bought at / near the ask price or a put is sold at / near the bid price. Options are “bearish” when a call is sold at / near the bid price or a put is bought at / near the ask price.
These observations are made without knowing the true intention of the investor in purchasing these options contracts. Activity suggests these strategies, but an observer cannot be sure whether a bettor plays the contract up front or if the options bettor is hedging a large underlying position in common stocks. In the latter case, bullish option activity may be less significant than a large investor’s exposure to their short position in common stocks.
Use these strategies to trade options
Unusual options activity is a profitable strategy that can greatly reward an investor if they are highly skilled, but for the less experienced trader, it should remain another tool for making an informed investment decision while taking into account other observations.
For more information on option alerts, visit https://pro.benzinga.help/en/articles/1769505-how-do-i-understand-options-alerts