Here's a free tutorial on using flow in your day to day trading, as well as tips and tricks for options flow.
As part of our free weekly Educational series
Hey all,
This is the Unusual Whales Team, and we are going to spend every Wednesday walking you through some trades of the week for free to help your trading!
These educational tutorials will be options or equities focused to help you understand why or how interesting and useful trades were made.
In this issue, we’re going to cover some options flow found and played by members of the community, and their tactics and reasoning for making the play. If you find this weekly free series interesting or useful, we’d love for you to subscribe to the podcast (subscribers get podcasts early and private newsletters) or share the newsletter!
Below, we’ll start off with an update on IonQ (IONQ) by YourBoyMilt, and how he uses filters on Unusual Whales to find plays on stocks with small to medium sized market caps.
IONQ: Why We Went with this Smaller Premium Ask Side Buy and How to Play Similar Tickers
Part 1: The Hedge Game: Why Bigger Stonks Require Bigger Premium Hunts
Let’s say I’m like 99% of FURUs and I’m hunting for NVDA flow. NVDA has a market cap of $1 trillion and some change, so I’m looking at premiums of at least 100k before I determine something in the flow could be noteworthy. Why’s that?
Larger Companies = Larger Institutional Investors = Larger Hedges
The name of the game with flow is simple–avoid the hedges, and instead follow the contracts that are indicative of actionable catalysts coming or increased institutional buying. When a contract is truly unusual is when it reflects both a volume and premium that would indicate it’s out of the norm; not just out of the norm as far as activity, but also size that would mean that it’s likely more than a hedge. So…
Smaller Companies Can, With Context, Reflect Unusual Activity Through Smaller Premiums
Let’s do some simple maths. If a typical eye-catching premium for NVDA at $1 trillion+ market cap would be 100k or more, then why wound’t I adjust that number downward for something smaller within the sector or the index.
Part 2: Enter IONQ
32k in premium may be laughable for larger stocks, but for a smaller company that is big in the AI space, it makes sense. Historically, IONQ doesn’t see volume like that come in – another factor that tips us off on unusual flow. The MSFTs, METAs, and BACs of the world are constantly getting walloping bets placed in the hundreds of thousands. But a smaller company like IONQ receiving even a third of that 100k premium should at least raise our eyebrows given its historic unusualness (if that’s not a word, I just made it one).
Building Confidence: Is it lagging the Sector?
Okay okay, IONQ looks good with our smaller premium spent on a deep OTM contract–but has the squeeze already been squoze? NOPE! It’s currently trading at 14.92, and had stalled out while other AI stocks were mooning like nobody’s business. If it’s a more obscure ticker you see flow on with historically weird premium that’s in a juicy sector–that gives us another green light!
Building Confidence 2: Is the sector getting flow?
Another sign that these hidden gems are ready to rip is if the flow is going their sectors direction. Here we noted the day after the IONQ orders were placed, more bull flow came in for AI as well.
To see how Milt found IONQ using filters, check out his Options Flow Tutorial video.
Trader Opens Risky Synthetic Long before Starbucks (SBUX) Earnings Report
The next unusual flow play was found by community member RhymesMarkets, who is a big fan of finding and tracking synthetic longs (aka “bullish risk reversals”)
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AND we’re back! Before we jump into the synthetic long they tracked on Starbucks (SBUX), a quick primer on what a synthetic long is.
A synthetic long is a bullish options strategy that involves selling to open put contracts (writing puts), and buying to open call contracts. The speculation made for this position is an increase in the stock price and an increase in volatility for the stock. As the stock price rises, the written puts lose value. Since the trader sold these to open, the more value the puts lose, the more of the credit they received goes into their pockets upon closing the position. Likewise, as the stock price rises, the calls they bought will gain value. However, given this strategy’s utilization of shorted contracts (the puts), there is a high risk of ruin, because if the stock drops, the trader is at risk of losing ALL of the money they bought calls with, and of OWING money on the puts they sold. Synthetic longs and synthetic shorts are very dangerous strategies that should not be attempted by anyone without a deep understanding of options and many years of experience.
Now with explanations out of the way, let’s take a look at the synthetic long found by RhymesMarkets for SBUX on August 1, 2023, immediately prior to the company’s earnings call.
As we always discuss, trading options before earnings is a bit of a gamble. We’ve all witnessed a company post good earnings and guidance yet still see a drop in stock price afterwards. In this case, our SBUX trader took a massive risk opening a synthetic long right before the company posted earnings. I would argue this trader had luck on their side, however; we'll get into that in just a moment.
Onto the structure of this trade. The trader opted to write the $90 put for 6/21/2024, selling 1,100 contracts at $2.40 per contract, and received $264k in credit. (this shows as “below the bid”, however, I generally regard “below bid” and “above ask” orders as “at bid” and “at ask”. You can read more about why Unusual Whales doesn’t carry a BB or AA filter here).
The trader utilized the $264k in credit they received from the written puts to then purchase (buy to open) the $120 calls of the same expiration; 1,100 volume at $3.35 per contract for a total of $369k in premium. Since they used credit from the puts, this trader only paid a debit of $105k for this position. One thing of note here, is the expiration date: this trader gave themselves plenty of time by grabbing June 2024 contracts. By buying time, they also circumvented the factor of implied volatility, which is usually quite high around a company’s earnings date. The IV of these contracts was between 25% and 27%, versus the inflated IV of closer-dated contracts, which had IV as high as 100%.
Now we’re to the point where I explain why this trader had luck on their side. SBUX reported earnings in after-hours on August 1st. Their estimated earnings per share (EPS) was $0.95, and the company reported an EPS of $1; a minor beat of 5%. Revenue, however, missed the mark by $8 million; expected revenue was $9.28 billion, and the company reported $9.2 billion in revenue.
Following the report, SBUX had a dramatic response, dropping as much as -1% during after hours trading. However, on the morning of 8/02, SBUX had an amazing rebound, and at the time of writing, was trading at a gain of +3% on the day. Since, as we mentioned, earnings can really go either way and are therefore dangerous to play, this trader in my opinion had luck on their side.
At the time of writing, this synthetic long was still open. Below are the fruits of their labor:
STO $80p 6/21/24 | $2.40 → $2.00; profit of $40 x 1,100 contracts = $44,000
BTO $120c 6/21/24 | $3.35 → $4.48; profit of $113 x 1,100 contracts = $124,300
So, by utilizing sold contracts to fund their bought contracts, this trader has effectively turned a $105,000 play into a total profit of $168,300.
I hope these examples from the community give you a better idea of how people are utilizing the Flow for their own trading. For more education and guides, you can head over to the Unusual Whales Courses page!
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