Getting The Whole Story From Unusual Volume

Hey Traders,

By now, if you’ve opened any Option Pit emails at all over the last few days, you’ve probably heard about the big “Hedge Fund Secrets Revealed” event we’re having on Thursday. (There’s still time to sign up here, but don’t wait too long!)

And there’s a reason we’re going so hard on this “hedge fund” angle … 

Because it matters.

The reason I (and many other traders) keep such a close eye on unusual trading volume is because many times, the biggest trades of the day are backed by some big bucks … and that usually indicates there’s “smart money” involved. And that “smart money” may or may not have information, or ways to trade, that the retail crowd hasn’t caught onto yet.

But you need to be careful you aren’t just spotting big volume and taking it at face value, because a lot of times you’re only getting a partial story!

For example, yesterday there was some heavy volume in this petroleum company’s pits that, taken at face value, would have told a completely different story than what was actually happening.

Here’s why sometimes you need to dig a little deeper to find the story (and that’s why you have Option Pit!).

Pass The PBR

No, not that kind of PBR – I’m talking about Petroleo Brasileiro (Ticker: PBR), a state-owned petroleum corporation headquartered in Rio de Janeiro, Brazil.

PBR hasn’t had an easy road since COVID hit – while the shares traded over $16 in 2019 (their highest price since early 2015), the pandemic saw the petroleum company plunge from the $15 mark to hit as low as $3.78.

Chart courtesy StockCharts

While the shares have gradually recovered — creating a series of higher highs and higher lows on the chart since hitting their pandemic bottom — the stock is currently staring at its just-overhead 20-day and 50-day moving average, which could pose a threat of double resistance for any further moves higher.

Yesterday, as I was watching heavy-volume trading in the market, I noticed some unusual put volume coming out of Petrobras’ pits.

With the shares trading near $10.70, two interesting orders came in:

      • 35,000 contracts of the July 30, 10-strike puts were purchased for $0.03.
      • 35,000 contracts of the July 30, 10.50-strike puts were sold for $0.09.

A pretty clear bull put spread, right?

Not so fast.

Looking at solely trading volume only tells you part of the story – and that’s where it’s easy to get into trouble.

Because these trades were actually bought and sold to close.

It looks like the original trades were opened on July 21, with 32,500 contracts of the July 30 10-strike puts sold for $0.04, and 32,500 contracts of the July 30 10.50-strike puts purchased for $0.18. 

Data courtesy Trade-Alert

(Since 35,000 contracts were closed on Monday, I think it’s likely that the extra contracts were opened at either a different time, or the original order for 35,000 contracts wasn’t filled in one fell swoop, but rather filled in several increments throughout the day. Total trading volume of over 35,000 in each of these contracts on July 21 does seem to support my suspicions.)

That’s a bear put spread, and that tells me something totally different about how Smart Money is trying to play this one.

Now instead of this trade indicating someone with very deep pockets is moderately bullish on this stock, instead I’m seeing the opposite – and I’m seeing their trade didn’t quite pan out like they had hoped!

Why does this matter?

It tells me totally different things about how smart money is playing the trade, and therefore I get a totally different message about which way “informed sentiment” may be leaning.

After all, there’s a big difference between trying to make $210,000 by betting a stock will stay above the near-the-money strike …

And betting $490,000 that the stock is going down! (That’s assuming all of the original 35,000 contracts were filled at the same bid/ask).

Now, to be clear, I’m not at all saying you need to dig into big volume trades so you can go out there and try to make the exact same trades yourself.

I’m just saying that spotting trades like this can give you valuable insight into what “smart money” is thinking, so be sure you’re getting the right insight.

I know it can be tricky to really get the whole story … but that’s what Option Pit is here for! 

In fact, tomorrow evening our resident Wall Street/Washington expert Frank Gregory will be telling you how he “cuts through the noise” to find trades just like hedge funds do. It’s going to be a good one, so make sure you’re registered here!

 Your Only Option,

Mark Sebastian


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