I’ve got some good news and some bad.
You see, there are a lot of investors out there that feel that stock market is rigged…and that the little guy has no chance of succeeding.
What I’m about to share with you might be disturbing…and possibly strengthen those beliefs.
However, I encourage to you read all the way through…you’ll be shocked and delighted you did.
Now, there are literally tens of millions of equity options traded daily. The majority of them are conducted by large institutional traders.
My focus tends to be on option orders that stick out like a sore thumb…on a good day I can find five or more …on other days, they are few and far between.
One of the exciting parts of following unusual options activity is that you’re eventually bound to come across something so unbelievable…so suspicious…that someone should be going to jail for cheating.
Now, I’m not implying that shady went down here…more like baffled….how did they know?
Allergan, Inc. (AGN)
On March 11, 2014, the stock was trading around $129 a share. Within the first half hour of the trading day, someone came in and bought 1,000 July 140 calls for $5.84…in addition, they sold 1,000 July 115 puts for $3.84. All together this trade was done for a debit of $2.
About an hour later, the trader came back…but this time they sold 1,000 July $160 calls for $1.92 and bought 1,000 July 105 puts for $2.17. This was done for a debit of $0.25.
So What Else Do We Know?
The July $140 calls bought were against open interest of 114 contracts. This means that this was a new or opening position. The same could be said for the July $115 puts that were sold (they were against 552 contracts of open interest.
This is a bullish bet that the stock trades higher
The trader is buying some time for their idea to play out.
At the time AGN on average traded 2,516 option contracts a day…on this date, nearly 8,000 contracts were traded. That’s 300% increase in options volume.
To be honest, although this is unusual options activity in the name, it’s not that crazy of an order. For example, there will be days we might see 10x or greater usual options volume in some stocks.
However, it’s something worth noting or putting on a watch list.
Fast Forward a Month
Technically, AGN is starting to break-down. On April 8th 2014, the stock was trading at $116 and below its 50 day moving average. What follows next is really interesting.
On April 11, 2014, call buyers were coming out in full force. This time, it was a little weird …over 8,000 calls traded vs. 1,000 puts. Again, this was about 3x usual options volume.
With the stock trading near $121 per share, there were over 2,300 April $130 calls traded…most of those were bought on the offer (the ask side), in fact…95%.
These options were initially bought for .30 in the morning…and with less than 10 minutes to go until the close….hundreds of them were getting scooped up for $0.50 and $0.55 (with only six days till expiration!).
Keep in mind, this was on a Friday…typically, this type of activity near the close, heading towards the weekend… indicates that something might be announced on Monday.
Oh yeah, want to hear what else that was pretty crazy. Remember, those July $160 calls that were sold for $1.92 in March…well, it appears that they were bought back (closing the short). Over 1,000 of the July $160s were bought for $0.55.
It Gets Better
On April 17th, those April $130 calls were trading above $3.85…as the stock closed at $133.92. That aggressive call buy from the previous Friday paid out handsomely. At this point in time, the stock moved up nearly 15% on the week.
So far, I’ve seen unusual options activity twice over the last month…and from what it looks like, these traders seemed to be the “real deal.”
You see, it’s ok to sit back and gather information before making a move. A lot of unusual option trades don’t pan out. That’s why it’s important to be selective.
However, these traders involved with AGN….have proven to be informed.
On April 21st, 11,506 contracts of AGN were traded….over 3,000 puts and 8,300 calls traded. Again, this was 3x usual option volume.
One interesting trade that went off in the morning was a trader bought over 550 May 150 calls for $1.55 and sold over 550 $125 puts for $1.10.
All together was done for a net debit of $0.45. A $24,750 “bet” that turned into over $850,000 in less than 24 hours.
You see, after the close that day, the stock popped to $165 per share on news that Bill Ackman and Valeant were eying a takeover on AGN.
Was someone tipped off?
Were they lucky or were they flat out cheating?
My answer: It doesn’t matter. I’ll leave that for the regulators to handle. The truth is…every option that is traded on the exchange…must be reported.
Whether they traded off insider information or not…we have the privilege of seeing their trades once they are reported. With that said, we have an opportunity to “legally steal” their ideas once it becomes public information.
Some of you might think that these traders were crooked. But you have to look at the bright side of things…these opportunities exist for us as well.
And that is one of the beauties of following unusual options activity. You get a front row seat of what the big boys and girls are doing.
On May 12, AGN’s board unanimously rejected Valeant’s proposal. Rumors are circulating that a larger bid from Valeant or someone else will soon follow.
On May 16, 2014, I noticed a pretty decent sized trade. One trader came in and bought 1,400 September $170 calls for $5.50 and simultaneously sold 1,400 September $140 puts for a credit of $3.50. The trade combined was done for a net debit of $2.00.
Only time will tell if the trade above will work. From what I’ve seen thus far, I wouldn’t bet against them being wrong.
Now, if you’d like a more detailed analysis on what to look out for when unusual option activity trades are made public.
You should check out our free report. It’s a step-by-step process that I’ve created… over the years…that attempts to spot the next big stock mover…and I think it’s pretty darn good.