Market Overview

Analyzing Yum China Holdings's Unusual Option Activity

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Yum China Holdings (NYSE: YUMC) shares experienced unusual options activity on Wednesday. The stock price moved up to $52.81 following the option alert.

  • Sentiment: BULLISH
  • Option Type: SWEEP
  • Trade Type: CALL
  • Expiration Date: 2020-08-21
  • Strike Price: $52.50
  • Volume: 414
  • Open Interest: 697

3 Indications of Unusual Options Activity

Exceptionally large volume is one way option activity can be considered unusual. The volume of options activity refers to the number of shares contracts traded for a day. Open interest describes unsettled contracts that have been traded but not closed by a counter-party. In other words, for each contract buyer, there must be a seller. A purchased contract remains open until a seller closes it, and vice versa.

When a contract has an expiration date in the distant future, it is generally another sign of unusual activity. Usually, additional time until a contract expires allows more opportunity for it to reach its strike price and grow its time value. Time value is important to consider because it represents the difference between the strike price and the value of the underlying asset.

“Out of the money” contracts are unusual because they are purchased with a strike price far from the underlying asset price. “Out of the money” occurs when the underlying price is under the strike price on a call option, or above the strike price on a put option. Buyers and sellers try to take advantage of a large profit margin in these instances because they are expecting the value of the underlying asset to change dramatically in the future.

Understanding Sentiment

  • Options are “bullish” when a call is purchased at/near ask price or a put is sold at/near bid price
  • Options are “bearish” when a call is sold at/near bid price or a put is bought at/near ask price

Although the activity is suggestive of these strategies, these observations are made without knowing the investor’s true intentions when purchasing these options contracts. An observer cannot be sure if the bettor is playing the contract outright or if they’re hedging a large underlying position in a common stock. For the latter case, the exposure a large investor has on their short position in common stock may be more meaningful than bullish option activity.

Trading Options With These Strategies

Unusual options activity is an advantageous strategy that may greatly reward an investor if they are highly skilled, but for the less experienced trader, it should remain as another tool to make an educated investment decision while taking other observations into account.

For more information to understand options alerts, visit https://pro.benzinga.help/en/articles/1769505-how-do-i-understand-options-alerts

 

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Posted-In: Options Markets