Market Overview

Analyzing Datadog's Unusual Options Activity

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On Friday, shares of Datadog (NASDAQ: DDOG) saw unusual options activity. After the option alert, the stock price moved down to $80.65.

  • Sentiment: BEARISH
  • Option Type: SWEEP
  • Trade Type: PUT
  • Expiration Date: 2020-09-18
  • Strike Price: $70.00
  • Volume: 836
  • Open Interest: 287

3 Indications of Unusual Options Activity

Extraordinarily large volume is one indication of unusual options activity. Volume refers to the total shares contracts traded in a day when discussing options activity. Contracts that have been traded, but not closed by a counter-party, are called open interest. A purchased contract cannot be considered closed until there exists both a buyer and seller for the option.

A contract with an expiration date in the distant future is another tell of unusual activity. Generally, additional time until a contract expires increases the potential for it to reach its strike price and grow its time value. Time value is important in this context because it represents the difference between the strike price and the value of the underlying asset.

Contracts with a strike price far from the underlying price are also considered unusual because they are defined as being “out of the money”. This occurs when the underlying price is under the strike price on a call option, or above the strike price on a put option. These trades are made because the underlying asset value is expected to change dramatically in the future, and the buyer or seller can take advantage of a greater profit margin.

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.

These observations are made without knowing the investor’s true intent by purchasing these options contracts. The activity is suggestive of these strategies, but an observer cannot be sure if a bettor is playing the contract outright or if the options bettor is hedging a large underlying position in common stock. For the latter case, bullish options activity may be less meaningful than the exposure a large investor has on their short position in common stock.

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 Tech