Actions of Baidu (NASDAQ: BIDU) saw some unusual option activities on Friday. After the unusual option alert, the stock price fell to $ 192.12.
Three ways of activity options are ‘unusual’
The exceptionally large volume (compared to historical averages) is one reason why activity in the options market can be considered unusual. The volume of options activity refers to the number of contracts traded during a given period of time. The number of contracts that have been traded, but not yet closed by any of the counterparties, is called open interest. A contract cannot be considered terminated until there is a buyer and a seller for it.
Another indicator of unusual options activity is the negotiation of a contract with an expiration date in the distant future. The additional time until a contract expires generally increases the potential to increase the time value and reach the strike price. It is important to consider the value of time because it represents the difference between the strike price and the value of the underlying asset.
Contracts that are “out of the money” are also indicative of unusual option activities. Out of the money contracts occur when the underlying price is below the strike price on a call option or above the strike price on a put option. These deals are made with the expectation that the value of the underlying asset will change dramatically in the future and that buyers and sellers will benefit from a higher profit margin.
High and low feelings
Options are “optimistic” when a call is bought / close to the put price or a put option is sold / close to the buy price. The options are “pessimistic” when a call option is sold at the buy price / close to the offer or a put option is bought at the close sell price /.
Although the activity is suggestive of these strategies, these observations are made without knowing the true intentions of the investor when purchasing these option contracts. An observer cannot be sure whether the bettor is playing the contract immediately or protecting a large underlying position in a common stock. For the latter case, the exposure that a large investor has in his short position in common shares may be more significant than the activity of optimistic options.
Using these options strategies
Unusual options activity is an advantageous strategy that can greatly reward an investor if he is highly qualified, but for the less experienced trader, it should remain another tool for making an informed investment decision, taking into account other observations.
For more information to understand the alert options, visit https://pro.benzinga.help/en/articles/1769505-how-do-i-understand-options-alerts
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