I have a friend that we’ll call…Michael
Michael is a great friend and an all around great guy.
In fact, he is one of the funniest people I have ever met.
If I was going to say he has one defect it is this:
He always has an ulterior motive.
“That place stinks…we should go to this Bar” (The bar is right by his office and/or house)
“Saturday is a terrible day to go out, we should all get together on Friday!” (He has date night on Saturday’s and couldn’t hang out).
I tell you this story not to make “Michael,” who probably knows this is him, feel bad (although if I did have an ulterior motive it would be that).
I tell you this story because option traders almost always have an ulterior motive.
Take a GIANT call buyer.
When the average retail trader sees a buyer of just out of the money calls, purchased on the offer, he or she probably thinks that the trade is bullish.
What if the GIANT call buyer, is doing that trade because they are bearish?
This is entirely possible…
Here is how:
Lets say I buy 100 calls in AAPL at the 130 strike expiring in november.
On their own, the calls give me exposure to 10,000 shares of AAPL above 130 for 6 bucks.
But what if at the same time I buy the calls, I unload a long stock position I was carrying?
Suppose I sell 10,000 shares at 124.00
When Apple stock drops to 110, am I happy or sad?
Yes I lost the value of the call, BUT, the drop in the stock was WAY bigger than the cost of the options.
I am happy!
This is the big institutional secret:
Oftentimes, call purchases are done because the call buyer thinks the stock is going to go down, not because the investor thinks it’s going up.
So what is a trader to do?
The answer is pay attention to the volume. Very rarely are 10,000, 15,000, or 25,000 lot calls bought on straight long bets.
That is NOT the case for 100, 1000, or 1500 lots.
Size does matter, huge volume in small lots is EXTREMELY bullish
Huge volume on HUGE LOTS might not be.
Your Only Option,
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