Options Action Meets the Zacks Rank
by Jared LevyJune 20, 2012 | Comments : 0 Recommended this article: (0)
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Options Action Meets the Zacks Rank
As a derivatives trader of 17 years, it’s hard for me to ignore the underlying trends in the options markets. Options are often where the “smart money” does a great deal of its trading because they can operate with a certain degree of anonymity.
At the same time, the Zacks Rank system is one of the most efficient ways to gauge smart money sentiment on the fundamental side.
In this new column I intend to integrate big option trades and trends along with the Zacks Rank to help verify if a bullish or bearish trend in the options is in agreement with the fundamental trends that we are seeing here at Zacks. I will also do my best to research news developments as well as incorporate analyst changes and technicals.
Remember that this is not a guarantee, nor should you go and fire off a trade without conducting your own due diligence.
Just because someone buys 5,000 call options doesn’t mean that they are bullish on the stock. Those calls could be purchased as a hedge to a very large short position or they could be only a part of a bearish spread that the trader is “legging” into. The trader could also be closing out an existing BEARISH position!
By combining options action with solid fundamental data, it helps stack the odds in our favor of targeting the real direction and intention of the big volume option players.
This is the classic case of a big option trade that misleads investors. Today, my searches brought Dole Food Co. ( DOLE - Snapshot Report ) to the top of the list of having high option volume relative to the average.
DOLE is a stock that doesn’t typically trade much option volume. Although the stock volume is good, DOLE tends to trade about 300 options per day, which is almost nil. Most stocks that are under $10 in price tend to have less option volume because their low stock price makes them almost an option themselves.
Today, someone traded about 2600 of the October 12.5 calls; another 200 put options traded, bringing the grand total to roughly 2800 options traded on the day, 1228% more than normal. At first take, one might think that this is a bullish trade, because it seems those calls were bought, but when you look closer, I don’t think that’s the case.
Let’s look at the stock and the trades themselves and it all makes sense.
DOLE is a Zacks Rank #5 Strong Sell, which automatically takes it off my list as a stock that I would want to buy. Next when you look at a chart of the stock, you see the extremely bearish pattern that it has been in over the past 4 months. There are also no bullish catalysts in the news that might cause a trader to take such a bullish move (DOLE is currently trading around $8.65) that would send it 44% higher by October.
Finally, when you look at the volatility of the options along with the open interest in those October 12.5 calls you will see that this is a trader that has most likely been short these calls and is taking profits. The current open interest is 4,373; if that number drops by 2500 or more tomorrow, we will have confirmation that this was just a trader taking profits on his trade.
For now, DOLE should remain on your Do Not Buy list!
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