Trading Unusual Options Activity and Earnings

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1 Trading Unusual Options Activity and Earnings Presented by James Ramelli Past performance is not indicative of future results.

2 RISK DISCLAIMER Day trading, short term trading, options trading, and futures trading are extremely risky undertakings. They generally are not appropriate for someone with limited capital, little or no trading experience, and/ or a low tolerance for risk. Never execute a trade unless you can afford to and are prepared to lose your entire investment. All trading operations involve serious risks, and you can lose your entire investment.

3 James Ramelli Active Trader in Futures, FX, Stocks & Commodities Regular Contributor to CNBC, Bloomberg, Fox Business, BNN Canada. Writes for Futures Magazine, Active Trader, Resource Investor, CME OpenMarkets

4 What is it? Unsual Options Activity: A large block trade that takes place at a multiple over the average daily option volume in a stock or ETF. Generally an order executed by an institutional player.

5 Terminology : Paper. What is Paper? Players : Who Trades Options? Why is Paper Important?

* Trader Buys Calls: Is it a Hedge or Speculation? * Trader Sells Calls: Protection against long stock position or speculation to establish short position.

6 * Trader Buys Calls: Is it a Hedge or Speculation? * Trader Sells Calls: Protection against long stock position or speculation to establish short position. * Trader Buys Puts: Protection against long stock position or speculation to downside? * Trader Sells Put: Protection against stock stock position or speculation to upside? Does reading Paper work 100% of the Time? The ticker tape doesn t lie, But you can never know the stock position behind big paper

7 * Paper Buys Calls : 60% - 40% Bullish / Bearish * Paper Sells Calls : 50% - 50% Bullish / Bearish * Paper Buys Puts : 65% - 35% Bullish / Bearish * *Paper Sells Puts : 80% - 20% Bullish / Bearish Does reading Paper work 100% of the Time? The ticker tape doesn t lie, But you can never know the stock position behind big paper

8 Mutual Funds, Pension Funds, Sovereign Wealth Funds KOTM Elite Traders By being able to see what the whales are doing, we can see opportunities to profit (eat what the whales are eating) or control risk by following larger trading organizations and knowing when to advert danger.

9 Unusual Option Activity Example Trade Size Symbol Expiration Strike Type Price Traded Time Stamp Implied the Time Exchange & Bid the time Opening or Closing Position Where stock was trading when the option trade happened Bought or Sold *Red Sold Green Bought

10 * The Institution will create an order based on the research, information, and analysis. * They call their brokerage to get the trade executed. * They will shop the order to Trading desks all over: Citadel, Goldman Sachs, Barclay s Bank, etc. * Then the trading will go the trading pit and the market markets can then trade it. * If not, the trading desk outside the trading pit will execute it, if not the firm might take the trade themselves. Does reading Paper work 100% of the Time? The ticker tape doesn t lie, But you can never know the stock position behind big paper

11 O.C.R.R.B.T.T Oak Ribbit Trading Plan O. Open Interest: Volume vs. Open Interest: I want to take Opening Positions only, not when a trader is selling their position. C. Chart: Hedge or Speculation? I want to get bullish trades where the activity is bullish and the chart line up. R. Risk: I always want to take a good set-up. R. Reward: Targets should be calculated before the trade is actually taken. B. Breakeven: On expiration, where will this stock need to move to breakeven. T. Time: Am I giving this trade enough time. T. Target: When do I take this trade off? On expiration, etc.

12 Open Interest I want to take trades where the volume > open interest.

13 Chart: Using technical analysis and chart reading can help me determine if a large block order is more likely a hedge or a speculative bet. The main indicator I use is the Ichimoku Cloud.

14 This is where they bought calls

15 Risk I need to have my risk well defined at the onset of the trade. I will NEVER take any trade that has unlimited risk. I can tweak trades that paper takes to adjust for my own personal risk tolerance. Reward I also want a well defined reward. This means I set my profit targets immediately and will not stray from them or change them. This also helps with overall discipline.

16 Breakeven When I am taking a trade I want to always know my breakeven point and I bias that on the charts, support, resistance, and moving averages. Trades with unrealistic breakeven points are more likely lottery ticket orders.

17 Time I want to make sure my timing is right. For earnings, I like to trade the weeklies, which is a one week bet. Other trades might be a month out, 3 months out or even a year out. Time is money

18 Target Use the measured move target to calculate where the stock might trade in that expiration. Measured Move Targets: Upside Target = ATM straddle price + Strike Downside Target = Strike ATM straddle price

It is labeled an opening position The chart is trading in bullish

19 Recent Examples Of UOA This trade hit the tape on June 3 rd early in the trading session. Does this meet our UOA requirements? It is labeled an opening position The chart is trading in bullish territory (we will examine on the next slide) Risk and reward metrics line up well Lets see what happened

20 Stock is trading above the cloud and above the major moving averages. How did I trade it?

21 Recent Examples Of UOA 1. ENTRY to Open and filled: I bought 30 $PL June 60 Calls for $1.35, 4 Targets: $1.50 and up every $.20, Confidence: 3 This was the entry that was announced after the trade hit OptionHacker. This was a relatively small position but as you will see on the next slide it turned out to be a HUGELY profitable trade.

22 That same night a higher bid came in for the company. PL stock GAPPED higher on the open the next morning.

23 Recent Examples Of UOA EXIT to Close and filled: I sold ALL 30 lot of $PL June 60 Calls for $9.30, paid $1.35 yesterday, OUT of $PL On $4,050 worth of risk total profit was $24,433 This is a textbook case of UOA. It is widely believed that there is options activity like this ahead of at least 25% of M&A and other deal activity.

weekend. This trade looked like maybe this trader believed there would be some kind of announcement over the weekend in GMCR. 6.

24 Recent Examples Of UOA This trade hit OptionHacker on June 6th with only 23 minutes until the Friday close. This is a very large bet for a weekly option, especially ahead of the weekend, where the trader will be short theta over the weekend. This trade looked like maybe this trader believed there would be some kind of announcement over the weekend in GMCR. 6. ENTRY to Open and filled: I bought 50 $GMCR Next Week 120 Calls for $.27 Sure enough, moments later, take over rumors begin circulating. Look at the chart

25 Stock RAGES into the close on the rumor that there will be some kind of deal activity over the weekend. Did this trader know something before he bought calls? Doesn t really matter to me. Let s see how we were able to take profits.

26 Recent Examples Of UOA Here are the exits: 14. EXIT to Close and filled: I sold 10 of 50 $GMCR Calls for $.36, paid $ EXIT to Close and filled: I sold 20 $GMCR Calls for $1.30 paid $ EXIT to Close and filled: I sold 5 more $GMCR Next Week 120 Calls for $2.00, paid $ EXIT to Close and filled: I sold ALL 5 lot of $GMCR 120 Calls for $3.10 This trade netted huge profits in only a few moments. Another great example of UOA

why they are always getting in trouble for Insider information.

27 Why Take these Trades??? The Hedge Funds and Big Traders have more information than us, that is why they are always getting in trouble for Insider information. Trade with the Pros Imagine knowing Carl Ichan or David Einhorn s positions before it is disclosed *** ALL TRADES ARE PUBLIC INFORMATION*****

Chart Modus Operandi: Strategic approach to catalyst trading from a systematic & methodical

28 H.I.M.C.R.R.B.T.T Trading Plan H. Historical Movement I. Implied Volatility M. Measured Move Targets C. Chart Modus Operandi: Strategic approach to catalyst trading from a systematic & methodical trading plan Typical Options I Use: Weeklies or Close to expiration options. Looking to play the catalyst not the direction of the stock R. Risk R. Reward B. Breakevens T. Time T. Target

29 H.I.M.C.R.R.B.T.T H: Historical Movement: How much the Stock has moved over the last 8 Quarters? - Institutional Market Memory I: Implied Movement: How much do current options imply the stock will move? - What are the Market Makers pricing in? What are MM selling the public? M: Measured Move Target: Using the ATM Straddle, Where will the Stock move Upward and Downwards. C: Chart: Bullish, Bearish or Neutral? - Ichimoku Cloud: Daily, Weekly, Monthly - Strength of trend into earnings. Gap Points? Support Resistance? R: Risk: How much of Total Book or Dollar Amount am I willing to lose. - Not swinging for the fences, Never more than 5% of Book R: Reward: How much do I want to make on this Trade? - What s a minimum acceptable Risk / Reward Ratio? B: Breakeven? I always to know my Breakeven Points - Where can I scratch out if things are looking iffy? T: Time: When do I think this will happen? - Time is Money...Know when the Trade is over Most Important! T: Target: Where will I take profits, scratch trades or stop out -Stick to the plan, Control Risk First, Manage Profits Second

30 Summary And Key Takeaways *Reading Paper does have its limitations and is not a "holy grail' system *Call Buying is Not Always Bullish *Put Buying is Not Always Bearish *Bulls can t bluff selling puts *Large Paper and Unusual Volume will help put the probabilities in your favor that big / smart $ is moving your way *O.C.R.R.B.T.T. *No Trading Plan or Trading system is without losses, if someone knew the holy grail trading system they would never sell it. *Understading that losses are forever a part of trading and that controling risk first, and managing profits second is most the important objective in any trading plan.

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