Ok, I will start off first, here's mine for today. Here's some option data that makes you wonder, does someone knows something about LUV? Does Unusual Option Volume Translate into a Trade Opportunity? Date 04/22/2016: Company: Southwest Airlines (SUV) Option Symbol: LUV LUV160520C00047500 Option: May 47.5 Call closed at $1.04, Expires May 20 2016, Volume: 18,285 / Open Interest: 1,044 First Question: There was only 1,044 contracts in O.I. (Open Interest) and suddenly 18,285 contracts are bought on a single day! Why? That unusual volume is not a significant event unless we can answer the following questions: 1: Did the "majority" of the unusual volume (18,285) move into O.I. the next day? Yes, the next business day was Date 04/25/2016: May 47.5C closed at $1.12. Open Interest: 15,161 (Prior day's O.I. 1,044) the Volume was bought and Held. 2: Was this just call spread sold? No, Volume and O.I. in all the strikes above and below the May 47.5C strikes did not have any significant volume or O.I 3: Maybe it was a straddle or strange? No, Volume and O.I. in all the strikes above and below the May 47.5P strikes did not have any significant volume or O.I. 4: Was this volume driven by an good earning's report or a news event? No, earnings isn't until July 21, 2016, that's 2 months after the May 47.5C expires. Also, I cannot find any significant potential news events. Conclusion: There's the strong possibility that a company insider has knowledge about an upcoming event and was willing to bet approx. $1.5m that the stock has a strong move upward when the news pops before expiration (5/20). Any thoughts on this, comments, or even a current trade idea of your own? Jeff
The Najarian Brothers claim that this is their strategy. They follow the money. When I was an Option MM, I made a living fading these vol spikes and then hedging with other options when demand subsides. My time frame was hours and theirs was days. I think you can make money doing both as long as you are disciplined.
When volume spikes from buying, IVOL always increases. When you are a MM, you are always doing the other side at price intervals, hedging with stock and adjust up all your values waiting to catch more buyers at higher prices or sellers to bring the prices back down. You just want to avoid selling too much too fast and getting caught. Bob
I think those guys did it when qualitative information flow behind the order was better. when I was trading flow (upstairs), I did your strategy.
I basically had no choice. It was the game I paid to play in. You would not pay all that money to be a MM if you did not take advantage of the order flow.
I missed the fade part in your post. So I interpreted your post as when you noticed a Vol (as in volume) Spike you followed the money and copied their trade.
No, that is what the Najarian Brothers do. When I traded as a market maker, my job was to provide depth and liquidity. I sold when those order bought. I would buy when they sell. I took the other side and hedged with the hope that I was being paid for my risk. It is possible because of my hedge, for us both to make money.
This type of analysis is very dangerous. It's highly likely the trader was getting short, not long. The call purchase along with short stock means they were buying the May 47.5 synthetic puts. Implied vols are sitting near the 52 week lows. It's a cheap synthetic bet on oil breaking out to the upside and LUV taking a dive. You have to be really careful being a homegamer.
--------------------------------------------------------------------------------------------- Let's keep track of this option's price activity until the large block of O.I. disappears. Today 4/25/2016 data (the 1st day after the open volume event) on the LUV May 47.5C: Prior Close: 1.04 / Open: 1.40 / High: 1.55 / Low: 1.10 / Today's Close: 1.12 Open Volume: 310 / Open Interest: 15,161 Jeff