How to Find Winning Stocks via Unusual Options Activity

Winning Stocks

The bull market of 2017 has produced many great trades for Cabot Options Trader subscribers.  Our big scores in Micron (MU), Visa (V), Microsoft (MSFT), Symantec (SYMC), Cisco (CSCO), Etsy (ETSY) and Union Pacific (UNP) were all found via unusual options activity.

Following hedge funds, institutions and big traders into similar options trades has been my most successful strategy for my nearly 20 years trading options. And while it’s not fair that these hedge funds may have insider information, there is nothing wrong with me following them into trades.

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3 Unusual Options Activity Signals

When examining unusual options activity (specifically call buying), I am looking for these signals:

  1. Big call buying in comparison to normal trading volume
  2. Large amounts of money put at risk by the call buyer
  3. Repeated bullish activity day after day.

When the call buying in UNP hit all three of these signals, I sent the following trade alert to Cabot Options Trader subscribers:

Buy Union Pacific (UNP) January 120 Calls (exp. 2019) for $8 or less.

As I highlighted yesterday in Stocks on Watch, a trader on Wednesday bought 137,500 Union Pacific (UNP) March 130/150 Bull Call Spreads for $0.62. Then, yesterday late afternoon, a trader bought an even bigger position premium wise. Here are the details of that trade:

Buyer of 60,000 January 130/160 Bull Call Spreads (exp. 2019) for $3.56 ($21 million in premium at risk)

This will add to a similar January 2019 bullish position, a buy of 50,000 January 140/160 Bull Call Spreads, which were already in open interest.

Also yesterday, there was a buyer of 2,000 June 130 Calls for $1.42.

And this morning, a trader bought 15,000 March 130/140 Bull Call Spreads for $0.68.

This longer-term positioning is extremely intriguing to me, and I am going to add UNP to the portfolio.

To execute this trade, you need to:

Buy to Open January 120 Calls (exp. 2019).

The most you can lose on this trade is $800 per call purchased.

A couple of days later, I sent this trade alert to sell half of the position:

Sell Half of Existing Position: Sell HALF your Union Pacific (UNP) January 120 Calls for $10 or more.

Following earnings yesterday, UNP closed higher by $6.20. And this morning the stock is up another $1.50. While my intention was to hold this position for quite some time, I am going to stick to my usual plan on selling half for a quick 30% profit. I will hold the balance of the position for much greater upside.

To execute this trade, you need to:

Sell to Close HALF your UNP January 120 Calls.

I am setting my mental stop at our original buy price of $7.65 on the balance of the position.

We were filled on the sale order, for even greater profits of 42%.

And then, the stock continued to rise, and I continued to raise my mental stop higher and higher. Here is the chart of UNP since the call buying began:

Here's what a big winner using an unusual options activity scanner looks like.First my stop was at $7.65.

Then I raised it $14.

And now today, with the call worth $23, that stop is set at $18.

A $7,500 Profit

This strategy of selling half, and then letting the remainder of my position ride for a home run, while raising my stops, has been my most successful strategy for managing winners.

As of today, if Cabot Options Trader subscribers bought 10 UNP January 120 Calls for $8, they could sell the last piece of the position for $23 or a profit of $1,500 per call purchased. Or a total profit of $7,500 on the remaining 5 calls.

And right now, Cabot Options Trader subscribers have executed a similar strategy, and have sold half, and are letting the remainder of their positions run, in CSCO and ETSY, going for even more home runs in 2017/2018. If you’d like to join them, click here.

Jacob Mintz

Quick Profits, Controlled Risk

Jacob Mintz is a professional options trader and Chief Analyst of Cabot Options Trader. He uses calls, puts and covered calls to guide investors to quick profits while always controlling risk. Beginners and experts alike can gain from following Jacob’s advice.

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