Stocks closed Friday’s trading session slightly down, but not far off from all-time highs.
With the Fourth of July behind us, most market participants will be focused on the upcoming earnings season, as well as, economic data from the Fed (near the end of the month).
However, we’ve got some time before those events…
…And if you haven’t noticed by now, I like to spend my Saturday’s looking at options…
….Specifically, unusual options activity.
What is unusual options activity?
XYZ stock on average trades 500 options contracts per day, but on Friday it traded 5000 calls. That would be an example of a stock option that saw unusual options activity.
It’s all about thinking in relative terms.
For example, 5,000 contracts on a single order in SPY might seem like a lot, but it’s not when you consider that SPY trades millions of options contracts on any given day.
What type of insight does tracking unusual options activity offer?
The idea is simple.
Hedge funds and other professional traders often use options to express their positions.
So, whenever they, you, or me, place an options order it gets reported to the Options Price Reporting Authority.
In other words, we can find out exactly what the “smart money” is doing. The challenge then becomes trying to dissect why they’re doing it.
For example, a trader could come out and buy a massive amount of puts. To the naked eye that might appear like a bearish bet.
- The trader was short puts and is buying puts to hedge
- The trader is long a boatload of stock and is buying puts to hedge
- The trader is short the stock and is buying puts to lock in profits
As you can see, it isn’t black and white, and there is a lot of noise you need to filter out.
I use an options scanning tool that helps me detect big option block trades, and for the past month I’ve been writing about it on my blog.
Thus far, my best find has been a +455% winner in SLCA calls.
Not bad, but I’m still trying to improve my scanning process, and hopefully develop something consistent, tried and true – like my Sniper Portfolio.
That said, I’m looking at two stocks in this edition of the UOA report, one bullish bet and one bearish bet.
Bullish Bets in Cambrex Corp (CBM)
Based out of East Rutherford, NJ, Cambrex is a biotech company that provides analytical services, and drug substance and product for small molecule active pharmaceutical ingredients.
The company offers APIs, enhanced drug products and advanced intermediate to pharmaceuticals companies, aiming to accelerate the development and commercialization of small molecule products.
A trader came in and bought 1,100 CBM July $50 calls for an average price of $0.24. The stock was trading at $46.56 at the time, and the bid/ask spread was $0.05 by $0.25.
Here’s what stands out:
- For the day, it was 8.3 times larger than usual options volume for Cambrex Corp.
- The trader didn’t try to work the order to get the best price, they just paid the ask
- This was not a large order, only $26K, but still an expensive lotto ticket, 16 delta options
- The options expire in less than two weeks, someone is expecting the move soon
- The earnings are in August which is after the July calls expire
And here’s what else:
Now, what’s interesting about the bullish bet on Cambrex (CBM) is the fact that it has two upcoming catalysts.
Cambrex will be attending The American Association of Veterinary Parasitologists from July 7 – 11… and it also will be at the Organic Reactions and Processes (ORP) Gordon Research Conference on July 21 – 26 (but that’s after the options expire).
However, it won’t be surprising for CBM to announce news ahead of those events.
Not only that, CBM has a bullish chart pattern.
If you look at the chart above, CBM has been trending higher from its February lows and is approaching a resistance level around $47.50 (the blue horizontal line). Now, this pattern is known as the ascending triangle pattern… and we typically see stocks break out of that resistance level.
Now, there’s a psychological level at $50… and if CBM does break above $47.50, it could gravitate towards that level… and if it breaks above that, there’s a small gap from $52.50 to above $55.
If it gets into that gap, it can act as a vacuum and just pull the stock higher.
Bearish Bets in Horizon Therapeutics (HZNP)
Dublin-based Horizon Therapeutics is a biopharmaceutical company with a pipeline that aims to provide treatments for diseases and illnesses with unmet needs. Some of the treatments in its pipeline include: Actimmune for the treatment of Friedreich’s Ataxia, Teprotumumab for treating Thyroid Eye Disease… and two other treatments for Gout.
If you know me, then you know that biotech catalysts trades are my bread-and-butter.
And I’m starting to love scanning for unusual options activity in biotech stocks.
That said, I came across some put options activity in Horizon Therapeutics on Friday.
A trader came in and bought 851 HZNP July 24 Puts at $0.65… which triggered a flurry of activity that ultimately led to 2,091 contracts traded on that strike. Some traders were paying up as high as $0.80 after the first initial order.
Here’s what stands out:
- A flurry of activity, and traders paying up each time
- 2.6 times its usual options volume
- The options traded were OTM and are expiring in less than two weeks, so something needs to happen fast
- The bid/ask spread was $0.30 by $0.85 at one point and traders still paid up, very aggressive buys
And here’s what else:
This bearish bet on Horizon Therapeutics (HZNP) is another one that’s really interesting because it’s expected to report data on Teprotumumab (it’s thyroid eye disease treatment) its U.S. Biologics License Application (BLA) submission mid-2019.
Now, there’s no specific date that the market is expecting this news… so something is up here, as those options expire in two weeks.
That said, maybe this put buyer is expecting some negative news surrounding HZNP’s BLA submission to hit the wire soon.
From a chart standpoint, HZNP looks pretty bearish.
We saw a double top formation, and HZNP start to make lower highs and lower lows.
Not only that, it filled the gap half way before it rebounded. However, it wouldn’t be surprising to see HZNP actually complete the gap fill and trade lower if a negative catalyst hits.
That’s all I got for this week’s UOA report. However, if you’d like to learn more about how to trade catalysts. And the catalyst strategy that I’ve used to make millions several times over, then you’ll want to watch this video: