Unusual Option Activity Scanner: Uncover What Big Hedge Funds Are Doing

Options trading screen

Unusual Option Activity is a Telling Indicator of Where the Wall Street Winds are Blowing.

My most successful strategy throughout my 18-year options trading career has been using my unusual option activity scanner to find the next hot stock. Here’s how it works.

When my proprietary options screener alerts me to a trader buying 10,000 calls and risking many millions of dollars, my alarm bells go off. Who is buying these calls, and why is he taking such a big position? Does he have insider information?

This Tripped My Unusual Option Activity Scanner

Warren Buffett, Carl Icahn and Bill Ackman are just a few of the many hedge funds and institutions known for using options to build positions. And for the past month the stock that has seen the most consistent and largest options trades has been Walt Disney (DIS). Here are just some of these large options trades from the middle of March through today:

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Buyer of 7,500 June 150 Calls for $0.23 – Stock at 133

Buyer of 2,200 July 145 Calls for $1.28 – Stock at 134

Buyer of 5,500 July 145 Calls for $1.35 – Stock at 134.5

Buyer of 3,300 September 165 Calls for $1 – Stock at 136

Buyer of 2,000 October 140 Calls for $6.30 — Stock at 139.5

Buyer of 2,500 August 150 Calls for $2.20 – Stock at 141.5

Buyer of 8,000 July 150 Calls for $0.22 – Stock at 141.5

Buyer of 12,000 July 150 Calls for $0.25 – Stock at 141

As you can see the DIS bulls have been actively buying calls nearly every day looking for the stock to move higher. And, in fact, since those trades were initiated DIS has broken out to a new all-time high!

And while straight call purchases are bullish, the trade structure that I find to be the biggest tell of the conviction these hedge funds have in a stock is an option trade called a “bull risk reversal.”

Bull risk reversals are a favorite tool for sophisticated hedge funds and are just about the most bullish trade you can execute using options because both components of the trade benefit if the stock heads higher: both the call buy is bullish and the put sale is bullish.

And what makes these trades so profitable (if they work) is that the premium collected via the put sale often pays for the premium paid for the call purchase.

Bull Risk Reversals Explained

Here’s how bull risk reversals work.

A bull risk reversal is typically used when a rise in the price of the underlying asset is expected. The strategy usually involves the sale of an out-of-the-money put and the purchase of an out-of-the-money call. The trade has unlimited profit potential to the upside and extreme loss potential to the downside.

For example, a January 20/25 bull risk reversal for a $1 credit would be:

Sale of January 20 Puts, and

Buy of January 25 Calls.

If the stock stays between 20 and 25, the trader collects the $1 credit.

If the stock goes to 20 or below, the trader will be forced to buy the stock at 20.

If the stock goes to 25 or above, the trader will exercise his right to buy the stock or simply sell his call for a profit.

Here is a profit and loss graph of this position:

This is the type of profit and loss chart I search for with unusual option activity scanner.Interestingly, DIS has seen many of these bull risk reversals and because of these trades, as well as the many straight call purchases listed above, my Cabot Options Trader subscribers own calls in Disney stock, which are at a profit of 45%.

If you want to know what other trades I’m currently recommending, or what my unusual option activity scanner is currently picking up, 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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*This post has been updated from an original version, published in 2017.

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