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Understanding Discover Financial's Unusual Options Activity

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Discover Financial (NYSE: DFS) shares experienced unusual options activity on Thursday. The stock price moved down to $49.73 following the option alert.

  • Sentiment: BULLISH
  • Option Type: SWEEP
  • Trade Type: CALL
  • Expiration Date: 2020-08-07
  • Strike Price: $50.50
  • Volume: 1481
  • Open Interest: 110

3 Ways Options Activity is ‘Unusual’

One way options activity can be considered unusual is when volume is exceptionally high. The volume of options activity refers to the number of shares contracts traded for a day. 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.

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.

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.

Bullish and Bearish Sentiments

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 options activity.

Using These Strategies to Trade Options

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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