We define unusual option activity as large block trades that represent a large percentage of daily option volume. The block trade is considered “unusual” if the option volume is above the average daily volume over the past 22 days. At KeeneOnTheMarket.com we scan and analyze order flow from all of the major options exchanges in order to identify any unusual option activity.

Analyzing unusual order flow gives traders a window into what the positions that large institutional players have. The majority of unusual option activity can be traced back to hedge funds, mutual funds, and other large institutions. Knowing where these institutions are placing their bets can be hugely advantageous for any trader. These institutions have informational and technological advantages that the average trader doesn’t have, and the amount of time and analysis that goes into every one of their trades is substantial. We offer this service through our 7 hour daily LIVE trading room http://bit.ly/135QWt8 or through Premium Twitter feed with all entries, exits, and unusual options activity tweeted all day long: http://bit.ly/11f0L9u .

Order flow can however at times be deceiving. One might logically thing that a large block buyer of calls is bullish on the underlying. This is not always the case. Remember that a large number of participants in the equity options market are hedgers. Long calls are a hedge against short stock, and long puts are a hedge against long stock. With this in mind we have developed a 7 step trading plan that helps filter out unusual option activity that will not provide actionable trade setups. It is by using this plan that we are able to identify the most significant unusual options activity trades every day.

Shares recently came under pressure after Russian producer OAO Uralkali announced it would form its own business, thus breaking up 1 of the 2 largest potash cartels in the world.  The ripple effect spread to the fertilizer industry, with analysts calls for a 20 to 25 percent drop in potash prices.  Following the news, POT share gapped down over $8 to open the July 30 session below $30.  While shares are currently down over 28 percent on the year, we expect POT shares to stabilize in the near-term, regardless of the validity of current fertilizer price projections. 

Rangebound: Iron Condor:

Selling the POT Sep 28-27 Bull Put Spread and Sell the 31-32 Bear Call Spread for $.36 total
Risk; $64 per 1 lot
Reward: $36 per 1 lot
Breakeven: $27.64 and $31.36

Greeks of this Trade:
Delta: Short
Gamma: Short
Theta: Long
Vega: Short

Trade: Selling the DG Sep 52.5-55 Call Spread for $1.20
Risk: $130 per 1 lot
Reward: $120 per 1 lot
Breakeven: $53.70

This trade reaches maximum profit if the stock closes below 52.5 on expiration, but it still profits anywhere below $53.70. This means that the stock can sell off, sit still, or even rally some and we will still profit in this trade.

Trade: Sell 1 Sep 35 Call for $2.70 for every 100 shares of stock bought at $37.15

Should the stock stay above 35 through September expiration this trade will profit $0.55. The trade is still profitable anywhere above $34.45. Should the stock close above 35 on expiration a trader would net a return of 1.48% in just 17 days. This is equivalent to an annualized return of 37.7%.

This morning Stern Agee lowered its forward guidance on DRI citing weak sales in the industry. On the downgrade we saw a flurry of unusual option activity in DRI. Early in today’s session a trader bought 4,000 DRI Oct 45 puts for $1.35. This block pushed daily option volume in DRI to a level 4.5 times its average daily volume.  Puts can be bought as a hedge against a long stock position, but with the weak chart in DRI this is unlikely. It is more likely that these puts were being bought for bearish speculation.  The October expiration also gives this trader exposure to DRI’s next quarterly earnings report on Sep 20^th. DRI is historically very weak on earnings. The stock has sold of 6 of the past 8 quarters on earnings day with an average move of 2.5%. With the weakness in the DRI chart and the stock’s historical weakness on earnings this block trade confirms that there is likely more downside in store for DRI.

Trade: Shorting DRI Stock at $46.87 with a $48.35 stop

Target #1: $46.01

Final Target: $44.21

Risk per 100 Shares: $148.00