Monday, the actions of Citigroup (NYSE: C) saw some unusual options activity. After the option alert, the stock price climbed to $ 76.67.
- Sentiment: BEARISH
- Option type: TRADE
- Type of trade: PUT
- Expiry date: 2022-06-17
- Strike price: $ 67.50
- Capacity: 3500
- Open interest: 2043
Three indications of unusual option activity
Exceptionally high volume (compared to historical averages) is one reason why options market activity can be considered unusual. Option activity volume refers to the number of contracts traded over a period of time. The number of contracts that have been traded, but have not yet been closed by either counterparty, is called open interest. A contract cannot be considered closed until there is both a buyer and a seller.
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 also indicate unusual options activity. Out-of-the-money contracts occur when the underlying price is less than the strike price of a call option or greater than the strike price of a put option. These transactions are carried out with the expectation that the value of the underlying asset will change drastically in the future and that buyers and sellers will benefit from a greater profit margin.
Bullish and bearish feelings
Options are “bullish” when a call is bought at / near the ask price or when a put is sold at / near the bid price. The options are “bearish” when a call is sold at the bid / near price or a put is bought at the ask / near price.
Although the activity evokes these strategies, these observations are made without knowing the true intentions of the investor when purchasing these options contracts. An observer cannot be sure if the bettor is outright playing the contract or if he is hedging a significant underlying position in a common stock. In the latter case, a large investor’s exposure to their short position in common stocks may be more significant than bullish options activity.
Trading options with these strategies
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 understanding option alerts, visit https://pro.benzinga.help/en/articles/1769505-how-do-i-understand-options-alerts