Options Order Flow

Yesterday was a very busy day in the options world. My list of bullish and bearish order flow trades was as long as it's been in a while. Because of that, and because the market may slow down again ahead of the ECB, OPEC and jobs report, I wanted to write about some of the trades from yesterday's list.

Yesterday morning there was an unusual buyer of 15,000 Occidental Petroleum (OXY) December 76.5 Calls for $1.00. This was a short term bet, and we followed the trader, but with a February call. OXY has been one of the best performing oil stocks this year, and if there is a run for oil stocks into year end, I wanted to be in a "leader". That said, oil continues to look awful, and the OPEC meeting Friday could be a volatile event for oil, and OXY.

As I have written in the past, my favorite order flow signal is the repeated big buyer, for whom price is no issue. This actually happened yesterday after we entered into our OXY trade. Later that afternoon a trader (very likely the same trader) bought 5,000 Occidental Petroleum (OXY) December 77 Calls for $1.15. This trader was paying more for calls further out of the money. For now at least, I really like this action.  

We recently entered into a bullish position in JetBlue (JBLU) after my scanner picked up widespread call buying in airline stocks. The sector had been weak following recent terrorism scares, but I liked the risk/reward in entering into a position based on the call activity in the sector. Similarly the Cruise Line sector has been weak, likely based on the same terrorism fears. However, much like the airline call buying from last week, yesterday there was a buyer of 10,000 Royal Caribbean Cruise (RCL) January 100 Calls for $1.01 and a buyer of 17,800 Carnival Cruise Lines (CCL) January 55 Calls for $0.75. I would be willing to guess with a high degree of certainty, because of the similarity of the RCL and CCL trades, they were made by the same trader.

Also in my bullish order flow list yesterday I made note of continued bullish activity in NVIDIA (NVDA). A trader, or traders, bought several thousand of each of the January 32, 33, 34 and 35 Calls. This is the action I love to see as NVDA continues to make new highs each day, and our position is now sitting at a profit of 110%. (Also of note, TSN is also making new highs, and our position could be closed for a profit of 133% if you so choose)

Yesterday there were three big trades in stocks that rarely see option activity. Here they are, along with my notes on each trade:

Buyer of 4,000 Getty Realty (GTY) March 17.5 Calls for $0.75 (average daily call volume of 176 contracts)
Buyer of 3,000 PacWest Bancorp (PACW) March 45 Calls for $4.00 (average daily call volume of 19 contracts)
Buyer of 2,500 Westar Energy (WR) March 45 Calls for $1.25 (trader has bought 13,000 of these calls in the last month)

This type of activity always raises red flags as these trades are far in excess of typical trading activity, and don't make sense to me. That said, trades that stick out, and don't make sense, are sometimes the trades that are made with some "information." I will continue to watch these stocks for continued bullish activity.

Yesterday a reader asked a great question about order flow, and sizable trades. The question essentially was, "How can a trader buy or sell 25,000/50,000 option contracts when there is no open interest and the bid/offer only shows a fraction of that size?" This question takes me back to my time on the trading floor as a market maker, and then later running a trading desk.

For nearly 10 years I stood in the trading crowds on the CBOE. It was my job to make markets on the options that traded in my trading crowd. So if a broker came into the crowd and asked for a market on EMC or Google options it was my job to provide liquidity for the broker. At the start of my trading career I would typically make markets to trade 100-500 contracts at a time. Later in my career, when I was running several trading crowds at a time, it was my job to make the biggest and tightest markets in the world. At that point I would make markets for 5,000-10,000 contracts.

As the trading floors began to wind down, I took my team off the floor and we began making markets for the banks and hedge funds via instant message and via phone. For example, Goldman Sachs might send me an instant message and ask for a market on Bank of America calls. I would give them my market, knowing that they were also getting markets from other trading desks and hedge funds. If I made the best market, and with the size they needed, then we would make the trade through a broker off the trading floor.

Having agreed on a price/size for this trade, in which I would have been selling 10,000 BAC Calls, I would figure out how to best hedge such a trade. I could simply buy 500,000 shares of BAC as a hedge, or perhaps buy calls in other bank stocks such as Wells Fargo or Citigroup. That is how trading desks are able to make such big trades.

Yesterday the S&P 500 gained approximately 1%. What I found interesting yesterday was the mixed directional bias of option activity. Typically, when the market is racing higher, my order flow list is weighed heavily towards calls vs. puts. Yesterday, my list was split almost 50/50. This may be attributed to hedging, or outright bearish bets, headed into the ECB, OPEC and jobs report later this week.

I would anticipate today to be a slow day ahead of these upcoming catalysts. That said, if the right opportunity presents itself, I will not be afraid to put on another position during this potentially volatile couple of days.

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