Smart Money Spreads and three big bets
Researching Unusual Options Activity (UOA) gives us great insight into how traders view the market …
Last week, for example, traders bet on falling stocks. Each of the options trades I’m going to highlight today involved stocks that lagged the market.
It makes sense. We’ve seen some volatility in the market, with just a few stocks pushing us higher and others wiping out. It’s only natural for options traders to start looking for oversold moves to bet on those stocks that are catching up.
It’s actually part of my strategy in Quick profits, where I use a Relative Rotation Graph (RRG) to spot turning points in struggling companies.
I do this because I’ve learned that most companies don’t stay ahead or behind in the market for long. In fact, the average time is a little over a week …
This means that stocks spend most of their time moving – from leading the market to weakening and then lagging behind – before improving and ultimately dominating the market. This cycle is the whole concept behind the RRG.
So I like to see traders bet on stocks for short term rebounds. And the heaviest bet came on top-flight stock from the start of this year …
A high-risk, big-money game on cannabis
Cannabis companies love Canopy Growth Corporation (Nasdaq: CGC) have been extremely volatile since states began legalizing recreational cannabis. Their heyday was back in 2018, when they were in a huge bubble.
CGC also had a big run in February, nearly hitting the highs of 2018. But since then, stocks have plunged more than 60% to around $ 20 a share.
But a trader stepped in last Thursday – as the stock traded more than 2% that day – with a big bet of $ 1.5 million for the stock to rally 20% over the course of the next month.
(Click here to enlarge the image.)
I have shaded the prices on the chart based on the RRG – with red being the lagging section, blue improving, green leading, and yellow weakening.
Even though the stock plunged 60% from the high, it wasn’t yet. The title has gone through several periods of lagging, improving and even leading the market in between. So it’s not unreasonable to think that CGC might turn around here.
The option they negotiated was the August 20, 2021 $ 22.50 call options for about $ 0.90 per share. With 17,000 contracts purchased and $ 90 per contract, that’s $ 1.5 million at stake.
Since this was a clear directional bet, it means that they stand to lose everything in this trade if the stock fails to climb. And CGC needs to climb about 21% just for this trade to break even.
When someone is willing to invest a lot of money in a short-term, high-risk move, I take itâ¦ and you should too.
And that’s far from the only major risk-taking that my scanner noted this week.
3 other high-risk moves to keep on your radar
Another notable element of the options business concerned the banking giant Charles Schwab Corp. (NYSE: SCHW).
SCHW is lagging behind the market, but has moved sideways over the past two months. This trader took the July 23, 2021 $ 71.50 calls for about $ 1.35. Over 3,400 contracts negotiated, valued at over $ 450,000.
Since the option expires on Friday, they opted for a strike just above the stock’s trading level. This means that the trader only needs to see the stock jump 3.5% this week to break even and earn a significant salary.
You might remember that the last time we highlighted bank stocks in UOA, they delivered monster returns – in one case 622%. It is therefore to watch …
Lordstown Motors (Nasdaq: RIDE), an electric vehicle maker, has fallen more than 70% since a peak in February. But a trader is willing to invest $ 380,000 on a higher rebound.
They bought 10,000 of July 30, 2021 $ 10 calls for about $ 0.38.
For them to break even, the stock must climb to $ 10.38, or 21% above the price it closed on Friday. Interestingly, these buyers surged after the stock rose 10% in a single day. There was no news to move the titleâ¦ but it’s a volatile company that sees fluctuations of 5-10% quite often.
This means that a 15% jump over the next two weeks is quite reasonable.
The last company is Royal Caribbean (NYSE: RCL). I reviewed RCL in May on my Bank It or Tank It YouTube series and put it on my Bank It list.
Since then, the stock has jumped 15%â¦ before giving up those gains and falling.
Now a trader steps in with a big bet on a massive short term rally. They bought 5,000 of August 13, 2021 Calls at $ 90 for about $ 0.55. That’s a bet of $ 275,000.
Honestly, looks like they’re just throwing a quarter of a million here. The stock has to climb 22% in less than a month for it to pay off. I would be surprised to see that happen.
It sounds crazy …
But, one of the main reasons that some large companies and whales in the market will still bet $ 275,000 on a whim is because if the stock jumps 23% – just 1% more – they risk falling. double their money.
Let’s say they’re right and the stock jumps 25% over the next month. This trader would cash in nearly a million dollars.
The odds seem slim. But RCL is expected to release a earnings report on August 9. A profit surprise could ignite a fire under the stock price and get the stock where that trader needs it just before expiration.
Again, some of these traders have money to spend and aren’t afraid to bet $ 275,000 for a chance to win a million dollars in payday. For most of us, this is not a bet we would like to place.
But we don’t have to take that exact trade, of course. We can look at these bets as a belief that the stock will moveâ¦ and place our own more conservative trades.
For example, you could buy an option that is closer to the money. That way, you wouldn’t need the stock to move that far just to break even.
As with any UOA transaction, be smart, take profits quickly, and never risk more than you can afford to lose.
Chad Shoop, CMT
Editor, Quick profits
PS To get content like this delivered to your inbox every day, subscribe to True masters of options. Click here and subscribe.