Ford engine (NYSE: F) shares experienced unusual option activity on Tuesday. The share price rose to $ 12.27 after the option alert.
- Feeling: BULLISH
- Option type: SWEEP
- Trade type: CALL
- Expiry date: 2021-09-17
- Exercise price: $ 15.00
- Volume: 26843
- Open Interest: 59723
Three ways options Activity is “unusual”
An unusually large volume (compared 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 discussing activities on the options market. Open interest is the number of unsettled contracts that have been traded by one of the counterparties but not yet closed. In other words, Open Interest represents the number of contracts that individual parties have written but for which they have not yet found a counterparty (i.e. a buyer who finds a seller or a seller who finds a buyer).
Another indicator of unusual option activity is trading in a contract with an expiration date in the distant future. Additional time until a contract expires generally increases the potential for it to increase in its fair value and reach its strike price. It is important to consider the fair value as it represents the difference between the strike price and the value of the underlying asset.
Contracts with a strike price that is far from the underlying price are also considered unusual as they are defined as “out of the money”. This occurs when the underlying price is below the exercise price for a call option or above the exercise price for a put option. These deals are made because the underlying asset is expected to change dramatically in the future and the buyer or seller can benefit from a higher profit margin.
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.
While activity is indicative of these strategies, these observations are made without knowing the true intentions of the investor in purchasing these options contracts. An observer cannot be sure whether the bettor is directly playing the contract or whether he is hedging a large 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 meaningful than bullish option activity.
Use these option strategies
Unusual option activity is a beneficial strategy that can be very rewarding to an investor if they are highly skilled. For less experienced traders, however, it should remain another tool for making an informed investment decision and considering other observations.
For more information on understanding option alerts, see https://pro.benzinga.help/en/articles/1769505-how-do-i-understand-options-alerts