I think we can all agree, as traders, one of the most challenging aspects of being a profitable trader is finding good ideas i.e. the best risk/reward strategies.
One great tool to help my trading process is to take a closer look into those large volume trades.
I break them down and analyze each trade to figure out the opinion of that large trader or sometimes called the “smart money”.
As individual market makers in the pit, we would always say “hold onto your wallet, here comes Goldman Sachs!”
The Goldman broker would come into the pit with a size order, but you never knew if there was more behind it!
When he returns for the second and third time with the same order, you are hedging your trade in the same direction.
AND amazingly, he was always right!
Let’s look at what was happening in SLV on Friday.
One of the first things to pop out is SLV ranked 7th in total option volume trading 1.32 million contracts with an average daily volume (ADV) of 382,000 contracts, that’s almost 3.5 times.
With over 3400 actively traded American stocks, being seventh is huge.
The second thing that stood out to me was a huge call spread that traded and was ranked as the 18th largest trade of the day.
Someone (smart money) bought the Mar19 23.5/25 call spread 25,000 times paying $.57.
They are buying the 23.5’s and selling the 25’s, paying $.57 to make $2.50 with 71 days until it expires.
Looking at the options chain and the implied volatility of those options, that is my kind of trade!
The 23.5 calls have an IV of 45.24 and the 25 calls IV is 46.61.
As I’ve said before a key element of my trading success is, “Buy the lower/sell the higher implied volatility.”
Looking at the SLV stock chart, Friday was an ugly day.
Let’s take a look at one of my next tools and look at the candlestick action from the trading day.
SLV traded down to $22.74 and closed down almost 7% at $23.51 creating a huge red candlestick.
You can also see with that size of a down move, the implied volatility of the options went up and the historical volatility of the stock went up, which is usually the case as stocks trade lower quickly.
The large candlestick on Friday traded down and bounced off the 50 day moving average, the blue line, which is usually support.
Other factors to note, the Feb19 and Mar19 25 calls are ranked 34th and 35th on Friday’s most active list AND SLV ranks 5th in total open interest with 7.99 million contracts outstanding.
People are ACTIVELY trading SLV!!
Lastly, my research uncovered several other bullish trades called risk reversals, which I will teach you in the future when we talk about option synthetics which is fascinating, fun and the whole reason we trade options!
So, I like the risk/reward of this Mar19 23.5/25 call spread paying up to $.57.
Also, my DIS spread was up 42% the first day and has since come back to even with the stock down $2.50: the power of decay! I am still in it, I still think DIS has some room on the downside.
Thanks for reading…See You Next Tuesday!
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