Unusual Options Activity: This Bet Is HUGE

Unusual Options Activity: This Bet Is HUGE

We got a big unusual options trade to talk about this week… Maybe the biggest so far.

But first, let’s take a quick high-level look at the market to kick off the week.

The S&P 500 ETF (SPY) is the most popular index in the stock market. It consists of 500 of the largest stocks in the market.

As the S&P 500 goes, so goes the overall market. And options traders are extremely active in SPY as well.

So by looking at the action in SPY options, we can see where the money is flowing broadly. And from that, we can judge the risk/reward of other trades.

This will change from week to week, and even day to day. So keep that in mind.

But last week, the options activity in the SPY was heavily bearish. There were fewer orders overall, but there was $10 million more plowed into put options than call options.

Two weeks ago, when the market started with some volatility, we had $5 million more in calls traded than puts, and with a ton of volume.

That tells us this week, the money is chasing a move to the downside.

And that’s what we saw on an individual stock basis as well…

Today, we’ll be looking at three options that had unusual activity. One is a hefty bullish bet, but two others are bearish and fall in line with the flow of the money in the SPY options.

Let’s dive in…

This Week’s Unusual Options Trades — and One HUGE Outlier

First up, the bullish bet on Darden Restaurants (DRI). One trader scooped up $270,000 worth of the January 21, 2022 $175 call options for $3.60.

This isn’t a huge bet, especially compared to the million-dollar ones we’ll talk about today. But it is still over a quarter-million bucks, and I like the setup here.

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Darden broke above the green line on the chart a few weeks ago on a solid earnings report. A long-term resistance that the price has rejected five times.

That was great to see, but even better was the retest of the green support line. Seeing that it held is a super bullish signal for the stock.

I like what this trader is watching, and I agree that Darden’s stock is likely to climb higher from here.

Next up is a $440,000 bearish bet on Paychex (PAYX), the payroll-processing giant.

The trader bought 1,000 of the January 21, 2022 $115 put options for $4.40.

This is another one that popped on earnings the other week, but instead of pulling back, prices kept shooting higher.

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You can see with the candlesticks shaded green, the stock is in the “leading” quadrant of my profit radar — the relative rotation graph. It just came out of the “improving” quadrant in blue. And the price has jumped 10% over the last week.

It’s a strong move higher that has the stock sitting on new all-time highs, but this trader is betting on a reversal. New highs are typically bullish, but we can still see a pullback take place.

And I think this trader is betting on that short-term pullback to capture some quick profits.

Last but not least, we have a truly massive bet wagered on TuSimple Holdings (TSP).

This is an autonomous trucking company that has only been publicly traded since April. So there is a lot of speculation around the stock. And you can see how a trader could take one side and place some bets.

But this bet was HUGE.

It came over three straight days where they purchased the same option, the December 17, 2021 $35 put option. Each day about $2 million flowed in on this one large trade.

In total, we’re talking more than $5 million betting on the stock to tank from here.

There’s not much to see on the price chart. But maybe, just maybe, this trader knows something about the company. That’s a lot of money to put on the line over the next two months without a ton of confidence.

Let’s see how this extremely unusual options trade plays out in the coming weeks.

Regards,

Chad Shoop, CMT
Editor, Quick Hit Profits

Chart of the Day:
A Reliable Volatility Signal

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You’d be hard pressed to find a better method of reading the Volatility Index (VIX) than with Bollinger Bands.

Bollinger Bands show the relative volatility of an asset. The wider the bands, the higher the volatility. And if an asset ever crosses above or below the bands, that’s a pretty reliable sell or buy signal, respectively.

But when applied to the VIX, we can think of the Bollinger Bands almost as measuring the “volatility of volatility.” And we can measure this not just with the bands themselves, but by reading the width.

Check out the indicator at the bottom of the chart. That tracks the width of the Bollinger Bands.

What you’ll notice is in the past year, volatility has surged every time the band width shrunk to a level of 0.15 (yellow line) or lower.

Conversely, volatility tends to cool off whenever the width of the bands exceeds the 0.58 level (orange) or in more extreme cases, the 0.88 level (red).

The 2020 pandemic panic, of course, is an outlier on this chart. The VIX was only ever higher during the Great Financial Crisis.

So what does this tell us today? Well, volatility remains fairly elevated, with stocks still chopping around. But it’s really in a sweet spot. We shouldn’t expect any volatility shocks in the coming days. I more expect volatility to recede as stocks shake off this rough patch and continue higher.

Regards,

Mike Merson
Managing Editor, True Options Masters

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