How to read short puts in the options flow and follow writing puts.

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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, and how to utilize and read the various tools on Unusual Whales. If you found them useful, feel free to subscribe to the Substack to support it!

In today’s issue, we’re going to go over a couple successful trades from the last week. Our focus today will be on short puts (aka written puts, sold to open puts) on NVIDIA Corporation ( $NVDA ).

As we’ve discussed before, there is more to options trading than just buying calls or buying puts. Selling contracts to open (aka “shorting” or “writing” contracts) is another popular tactic utilized by options traders. Writing puts generally indicates a bullish sentiment by the trader, as the trader receives a credit for selling those contracts to open. 

As the stock price rises, the put contracts lose value–this allows the trader to buy those contracts back, and pocket the difference between their entry price (the credit received) and the losses incurred by the contract itself. If the stock drops after puts were shorted, the trader loses the difference between entry price and the value gained on the contracts. In the case of NVDA this week, put-writers came out on top.

On the morning of Tuesday, October 10th, we spotted some notable flow for two separate put strikes on NVDA. The first strike we’ll look at is the $457.5P 10/20/2023. At around 10:40am Eastern, a series of orders totalling 501 contracts hit the tape at an average of $6.00 per contract, followed shortly after by more orders, bringing that total volume up to 1,300+, with an average bid-side fill of $5.89 per contract. 

This was interesting due to two factors. First, these orders brought the daily volume well above the existing open interest, indicating to us that these were new positions opening. Second, by the time these written puts hit the flow, the value of the contract had already fallen from around $9.65  per contract down to our trader’s average fill price of $5.89; a nearly -40% drop from the contract’s high-of-day value. Another series of orders came in totaling 1,000 volume at the bid of $5.95 per contract. Within minutes of this, it appeared our trader (or traders) were on their way to profitability, perhaps to the point of exiting their trade; but no evidence of exit came. In fact, the position only grew.

By 12:30pm Eastern, the contract value had fallen to $4.49; instead of taking their $150-200 per contract profit, we observed another series of bid-side orders right at $4.49 for an additional 1,500 volume. Through the rest of the afternoon, the put contracts dipped as low as $3.91 per contract without evidence of an exit before bouncing back up to close the trading session at $4.96.

Before we get to the end result on Wednesday, 10/11, let’s take a look at our other NVDA flow; this time on the $455P 10/20/2023 contract.

In the case of the $455P, we don’t see positional adds  throughout the day. Our focus falls mainly on one set of orders that hit the tape around the same time as the $457.5’s for 10/13. At 10:40am EST, we observed 1,805 volume at the bid with an average fill of $9.36 per contract.

As mentioned, unlike the repeat flow we saw on $457.50, this set of orders marked the only notable flow on the $455P 10/20/2023, but we were able to confirm this position as an opening trade due to the daily volume breaching existing open interest. The trader here held their position to a low of $7.24 per contract, before the contract settled at $8.52 by the end of the trading session (still a gain of +9% on their credit).

Moving on to Wednesday, October 11th, we were able to confirm that both the $457.5P 10/13/2023 and the $455P 10/20/2023 remained open by looking at the updated open interest that morning. Through the pre-market session and into market open, the NVDA stock continued its upward trend from the prior day, and we saw significant profitability for both trades. Let’s start with the now 2 days til expiry $457.5P 10/13/2023.

In the image above, we see +4,504 contracts that traded on 10/10 carried over into open interest, indicating that new positions were added and held. NVDA continued to rise in the morning session, bringing these $457.5P down to a low of $1.86. In the option chart, we observed 8.6k volume transacted, many at the ask. Given the profitability of the trade ($6.00 -> $1.86 for many of those contracts), I’d wager much of that ask-side volume was profit taking from our put writer. This will be confirmed or disproven by the updated open interest going into Thursday.

Now on to the $455P 10/20/2023. Once again, we confirmed that our 1,800+ at-bid volume from 10/10 remained open (which we assumed already due to the lack of volume following those orders) via the morning’s updated open interest. Our put writer was correct to hold; during the 10/11 morning trading session, NVDA continued to rise, pushing the value of these contracts further down. Given the 1,800+ volume on 10/11, much of it taking place at-ask, it’s possible our trader closed the position for profits. Taking the average bid fill from 10/10 of $9.36, this position profited a maximum of $748,800 from the -44% drawdown on the contracts to a low of $5.20.

So, let’s recap these trades using the average fill prices by total at-bid volume:

$457.5P 10/13/2023 | $5.35 (receives ~$2.05M) -> $1.86, -65% (profit roughly $1.3M)

$455P    10/20/2023 | $9.36 (receives ~$1.68M) -> $5.20, -44% (profit roughly $748k)

Thank you as always for reading! I hope you find these types of articles helpful in your journey to learning how to read and interpret the flow, as well as realize that buying contracts to open isn’t the only way to profitably trade!

NOTE: This post is not financial advice. The stock market is risky, and any trade or investment is expected to have some, or total, loss. Please do research before any trade. Do not use this information for investment decisions. Check terms on site for full terms. Agree to terms before considering this information.

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