Though the popularity of option has grown over the past decade among retail traders, they have always been an important element for professional traders. With the assistance of main stream media such as television and major financial news websites, options have become an increasingly popular part of market discussions. Yet, the majority of the population neglects to understand the basics and the implications of options activity and their impact on specific equity volume spikes and price action.
This is not to suggest that option activity is a definitive direction play as it relates to the underlying equity. Option activity serves as almost an institutional sentiment as it relates to specific securities.
This is especially true of earnings season and the increased activity in weekly options. Because of their shorter duration, weekly options are, at times, used to place binary bets. During earnings season and the interest in weekly options, we can observe numerous occurrences of directional bets taking place.
Whether in the form of large blocks or sweeps, scanners typically identify rather impressive positions being established in anticipation of earnings announcement and the subsequent analyst ratings and opinion statements. One of the more impressive trades picked up this week was in Disney DIS on Monday August 3. A scan identified a rather large put activity in the Aug 115 strike @ $0.68. Over 8000 contacts were transacted on the offer. The wager was clearly leaning towards the bearish side.
By Wednesday, we witnessed DIS open significantly lower after the earnings announcement.
The caveat in this example is that the market reaction to the DIS earnings report was rather negative, implicitly allowing greater volatility in the PUT options and underlying equity.
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