How to follow call writing and trade Unusual Flow with high volume tickers like Tesla, TSLA

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This the Unusual Whales Team, and we are going to spend every Wednesday walking you through some trades of the week. These will be options or equities focused, and be educational to help you understand a why or how interesting and useful trades were made. We are having a July 4th sale for 15% off if you want to try out the tools!

Today, we’re going to look at call writing and figuring out unusual flow for a heavily traded ticker, and how to spot useful information through the noise (shorted calls, calls sold to open) from June 26th on TSLA.

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Call Writer Nails TSLA Stock Downside

Generally, when people think of options, they think of buying calls to speculate upside movement, and buying puts to speculate on the downside. But buying options isn’t the only way to trade–they can be “sold to open”, as well.

As a refresher, when a trader shorts calls (sells them to open a new position), they are speculating on downside movement. If a seller sells puts to open, they are speculating on upside movement. You can learn about this and more by checking out the Unusual Whales Options Basics courses.

Today, we’re going to take a look at some fairly aggressive call writing on TSLA. We’ve discussed before how big companies like TSLA see a crazy amount of options volume each day, which can make it difficult for flow traders to get a read on directionality. However, on the morning of June 26th, we noticed unusual activity on a number of call strikes for TSLA. 

As you can see above, numerous TSLA strikes hit the tape early in the trading session. The column outlined in purple shows us that the vast majority of transactions for those strikes occurred at or near the bid; and given the low Open Interest vs. High Volume, we can be confident some of these are opening trades. For the sake of time, we’re only going to dive deeper into one of the two strikes outlined in green: the $237.5c for 6/30/2023.

At the time of the original orders, Tesla stock was trading between $255.71 and $256.65. Our call writer transacted 462 contracts of $437.5c 6/30/2023 at the BID of $16.65 per contract, and received $769k in credit. 

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But why is this unusual flow? These contracts were fairly deep in the money, with a short-dated expiration. These two factors, plus the Volume > Open Interest, led us to believe a trader wanted to speculate on downside for the stock. Let’s get another graphic of these orders.

As you can see above, the volume for this contract mainly came in during the early morning session; the red volume bar shows us the majority of contracts transacted did so at or near the Bid price. Shortly after the order, the value of the contracts jumped as TSLA enjoyed some upside movement. We know via the yellow line tracking contract price that our trader went negative for a short while–the contracts went as high as $21.50 per contract. Judging by the volume bars that followed, our trader did not exit their position.

Moving forward in the day, you can see a dramatic drop in the contract value. Within 3 hours of placing the order, the $237.5c for 6/30 dropped from $16.65 (our trader’s entry) all the way down to around $11.00 per contract as time did its job. Let’s get a visual of the trade with Tesla’s chart, because $11.00 was not the lowest point these contracts reached.

Now looking at the timeline a bit, here. We can see the aforementioned upward price movement following the fill, but our trader held strong. Shortly after, TSLA’s share price plummeted from $258.36 that morning all the way down to $240.70 by market close. The value of those contracts dropped from $16.65 at the time of entry to a low of $8.58 by end of day.

At the time of writing, this position is still open, so we can’t say for sure how much this trader will make by the time they close; but we can take a look at their potential profits thus far. Let’s revisit:

9:33am EST–  TSLA trading at $256.65– Trader writes 462 contracts of the $437.5c 6/30/2023 at $16.65, receiving $769k in credit

4:30pm EST– TSLA trading at $240.70– Contract value has dropped to $8.58, or -$8.07 per contract

Total potential profits by market close on 6/26– $396.4k 

($16.55 credit - $8.58 = $8.07 per contract. $8.07 x 462 contracts = $396,396. This is the total premium the trader would pocket if they were to buy those contracts back (cover) at market close).

While this trade isn’t as sexy or extravagant as the SPY trader we covered last week, it stands as a great example of unusual options activity on a ticker whose flow is so oversaturated, it can be difficult to find directionality.

As a reminder, we are having a July 4th sale for 15% off if you want to try out the tools!

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