Smart Money Spreads And Three Big Bets

I constantly scan the options market for unusual activity. But last Thursday was something else.

While I tend to screen for large option orders on specific stocks, last week I also noticed a lot of smart options activity taking place. Things beyond one-way directional bets.

Don’t worry, I still spotted a few large bets that we want to track in the coming weeks. I’ll highlight those for you today.

But first, let’s flash back to last Thursday…

The broad indexes sunk more than 1% at the open and slowly traded higher throughout the day. Markets seemed to get spooked by a spike in bond yields and rising jobless claims — just the latest issues giving traders a reason to sell.

It’s days like this I love to watch the options market. Because it shows us how the really crafty traders are willing to place their bets.

All of the unusual activity I’m showing you today came on the heels of Thursday’s volatility.

So, before I show you the trades to watch, I want to highlight the smart trades that were taking place — options spreads.

A Conservative Options Trading Strategy

As the market was experiencing this volatility, I was watching the unusual options activity closely to see what traders were doing about it.

What I noticed was that they weren’t taking huge gambles, but placed a ton of smart bets instead.

The options that saw heavy action Thursday were almost always tied to some sort of spread trade, where they bought or sold at least two options on the same stock. Some were flat-out writing calls or puts to capitalize on increased volatility.

I don’t typically share these trades with you because it’s impossible to know the direction they expect the stock to go. The activity doesn’t tell us what is going on. So there’s no actionable advice to come from it, except for the fact traders are taking advantage of swings in the market with spread trades instead of outright bets.

But the thing with spread trades is they limit your risk. By buying one strike and selling another at the same expiration date, you’re able to pin down your maximum profit and loss. This is a smart move lots of big funds use to hedge their bets.

So, while this doesn’t make for many juicy trade ideas, it does show why spread trades are such a good strategy to have during times of volatility.

Of course, here we look for unusual options activity. And the most unusual trades are the ones that aren’t hedged.

Let me show you the three heavy-hitting trades I found this week, all told worth about $1.5 million…

Unusual Options Activity: Bullish on Tech, Bearish on Beer

TrueCar (Nasdaq: TRUE), an online service for car buying, stayed strong and finished Thursday in the green. That’s the kind of stuff you love to see when the market gets hit with some selling pressure. And the action encouraged one trader to bet $200,000 on the stock to pop 20% over the next 40 days.

This trader bought 4,000 contracts of the August 20, 2021 $6 call options for about $0.50 a pop. Remember, one options contract equals 100 shares of stock. So at $0.50 per share, that ends up being a $200,000 bet.

With TRUE trading at $5.62 at writing, the stock needs to jump over 15% by August 20 just to hit breakeven.

Ontrak (Nasdaq: OTRK), another small-cap stock, was up over 4% on Thursday. The telehealth company is attracting at least one very large trader. They scooped up the August 20, 2021 $55 calls for about $0.78 a pop. And they went large, with over 10,000 contracts for an $800,000 trade.

Now, this stock has gone nowhere since its last earnings report, where shares tanked 45%. This trader clearly believes it was oversold and since it hasn’t fallen any more, the next earnings announcement in August could help push the stock higher.

Still, the move seems a bit out of reach. With OTRK trading at $32.36 as of this writing, they would need a 72% rally before August 20 just to hit breakeven.

Anheuser-Busch InBev SA/NV (NYSE: BUD), the adult-beverage giant, closed down 1.65% on Thursday but was down as much as 2.5%. The red tape on the day has one trader betting on a steeper decline.

They laid out $460,000 betting on BUD to keep falling, picking up the August 20 $69 put options for about $0.85. With over 5,000 contracts, that’s more than $460,000 on the line.

The stock has already fallen 10% since June but clearly this trader expects more pain on the way. They have just over a month to see if BUD takes another dip lower. And it wouldn’t take much of a move to break even — just 2.4%.

That’s all for my unusual options activity this Monday. I’ll keep an eye on my activity scanners this week and let you know if anything interesting pops up.

Just keep in mind … with these smart money trades, be sure not to bet the farm if you intend to follow them. Just because someone with a big bankroll is placing their trades doesn’t guarantee it’ll pan out.

Regards,

Chad Shoop, CMT
Editor, Quick Hit Profits

P.S. To get content like this in your inbox everyday, subscribe to True Options Masters. Click here and subscribe.

By Mike Merson, Managing Editor, True Options Masters

(Click here to view larger image.)

For today’s chart, I’m bringing you a dead-simple trading plan for the tech market.

This chart of the Nasdaq 100 E-Mini Futures (NQ1!) has formed a clear uptrend channel over the past month and a half. And in that span, it’s presented a number of great buying and selling opportunities in the tech market.

Channels like these are a godsend for traders. Whenever the index approaches the upper trendline, you simply sell tech stocks (or buy at-the-money put options on an exchange-traded fund like QQQ). Whenever it approaches the bottom of the channel, you buy tech stocks (or at-the-money call options).

And the more times the price touches the edges of this channel, the stronger the trend becomes…

It looks like the Nasdaq could approach the top of this channel in the next week or two, which would be around 15,000. That would be a good opportunity to get short.

If it instead falls to the 14,700 level, there’s your time to get long.

But if either line breaks definitively, with a daily close, it becomes time to reassess the pattern.

Best,
Mike Merson
Managing Editor, True Options Masters

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