An Insider’s View into Insider Trading
Order Flow Reading
How to Follow the Big Traders
Recently a report was leaked detailing a potential FBI and SEC probe into whether Carl Icahn tipped off Las Vegas bettor William “Billy” Walters and professional golfer Phil Mickelson about his offer to buy Clorox (CLX) in July 2011.
I remember the trading in CLX right before that takeover quite well. CLX was a slow, steady stock that chopped around in a mild manner. If the stock moved more than a dollar, it was considered a significant move.
On July 11, 2011, just a couple of days before Icahn’s buyout proposal, one trader or several traders bought over 16,000 CLX calls-over 50 times the average volume! The two strikes that were bought most aggressively were July 70 Calls and July 72.5 Calls.
While trading volume of over 50 times average volume is clearly suspicious, what really stood out were the strikes the trader(s) was buying, the limited life of the calls and how aggressively they were doing it. As I mentioned, CLX was an incredibly low volatility stock.
With just four days until the calls expired, and no known catalyst, why would someone aggressively buy July 72.5 Calls that were several dollars out of the money? It made no rational sense-unless someone had inside information.
And now it appears that someone did!
On July 14, just three days after my scanner picked up on that significant spike in options activity, it was announced that Carl Icahn had offered $76.50 a share for CLX-a premium of nearly 10% over the stock price the week before. Some of those calls returned well over 600%.
This type of potentially illegal activity makes the trading game feel rigged. At Cabot Options Trader and Cabot Options Trader Pro, I try to level the playing field.
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Every day, I highlight unusual option activity like the Clorox example above to my Cabot Options Trader and Cabot Options Trader Pro subscribers.
And following big hedge funds into their options trades has rewarded my subscribers with big winners. Here are just a couple of examples of trades that I have highlighted for my readers before the breaking news:
* Talisman (TLM) right before Carl Icahn’s ownership stake was announced,
* Mylan (MYL) right before a competitor’s takeover offer,
* T-Mobile (TMUS) right before takeover rumors,
* Applied Materials (AMAT) right before a blowout earnings release, and
* Microsoft (MSFT) right before Steve Ballmer announced his retirement.
To illustrate how I communicate to my subscribers, here’s the daily order flow reading email that I sent to my subscribers Thursday morning:
Below are recent large order flows that I’ve noted. Order Flow Reading is a strategy I use to follow the biggest hedge funds or traders into their trades. A scanner tool that I created helps me find these large trades, which may be based on insider information. You can use this order flow information to put on similar trades, learn more about options or get a better feel for market tone. The Covered Call Ideas below are simply ideas you can use if you’re looking to create a little extra yield in your portfolio.
Bullish Order Flow:
Buyer of 4,800 Interpublic Group (IPG) August 21 Calls for $0.475
Buyer of 5,000 NextEra Energy (NEE) August 105 Calls for $1.15
Buyer of 10,000 Anheuser Busch (BUD) September 125 Calls for $1.15
Buyer of 5,000 Marathon Petroleum (MPC) October 90 Calls for $1.80 Buyer of 6,250 Halliburton (HAL) October 70/75 Bull Call Spreads for $1.92
Bearish Order Flow:
Buyer of 30,000 Energy Select (XLE) September 95/90 Bear Put Spreads for $0.81
Buyer of 3,500 Teck Resources (TCK) November 21 Puts for $1.12
Buyer of 20,000 Semiconductors ETF (SMH) August 48/45 Bear Put Spread $0.61
Large long-term buying of Hospital and Managed Care Puts:
Buyer of 7,500 HCA Holdings (HCA) January 57.5 Puts for $4.90
Buyer of 7,500 Tenet Healthcare (THC) January 48 Puts for $4.85
Buyer of 3,750 Cigna Healthcare (CI) January 90 Puts for $5.75
Covered Calls:
Buy Home Depot (HD) Stock at 80.50, Sell the August 82.5 Calls for $1
Static Return: 1.25%
Breakeven: 79.50
Covered Call Return (if assigned): 3.77%
Buy Yelp (YELP) Stock at 77.50, Sell the August 80 Calls for $6.50
Static Return: 9.15%
Breakeven: 71
Covered Call Return (if assigned): 12.67%
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As you can see, there are many trades that my proprietary scanning tool finds every day. My readers use this list for trade idea generation, to understand which sectors are seeing big buying and to get a read on market tone.
However, I don’t recommend blindly following these big traders into every trade.
That’s where my expertise comes into play. Once my scanner picks up on the unusual activity, I begin to break down the trade to see if I like the risk/reward and trade structure, and if there’s a better way to initiate a trade. If all the variables look good, then I will send a trade recommendation to my readers.
To get started, look for the invitation to join Cabot Options Trader next week.
Your guide to successful options trading,
Jacob Mintz
Chief Analyst,
Cabot Options Trader and Cabot Options Trader Pro
P.S. The Dow is headed for 18,000 and you want to be in on the ride! Get Mike Cintolo’s entire buy list free, as part of an introductory offer on Cabot Market Letter. Sign up right away if you want to get on board before the next big run-up begins. Grab 50% gains in 60 days or you won’t pay a dime.
