Actions of Baidu (NASDAQ: BIDU) posted unusual options activity on Friday. Following the unusual option alert, the stock price fell to $ 192.12.
Three way options activity is ‘unusual’
Exceptionally large volume (compared to historical averages) is one reason why options market activity can be considered unusual. Option activity volume refers to the number of contracts traded over a specified period of time. The number of contracts that have been traded, but none of the counterparties have closed yet, is called open interest. A contract cannot be considered closed until there is a buyer and a seller for it.
Another unusual indicator of option activity is trading a contract with an expiration date in the distant future. The additional time until a contract expires generally increases the chance that its time value will increase and reach its strike price. Time value is important to consider 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 options activity. Out of the money contracts occur when the underlying price is below the strike price of a call option or above the strike price of a put option. These operations are carried out with the expectation that the value of the underlying asset will change dramatically in the future, and buyers and sellers will benefit from a higher profit margin.
Bullish and bearish sentiments
Options are “bullish” when a call option is bought at or near the offer price or when a put option is sold at or near the offer price. Options are “bearish” when a call option is sold at or near offer price or when a put option is bought at near or near offer price.
Although the activity suggests these strategies, these observations are made without knowing the true intentions of the investor when buying these option contracts. An observer cannot be sure whether the bettor is playing the contract directly or hedging a large underlying position in a common stock. For the latter case, a large investor’s exposure to his short position in common stocks may be more significant than bullish options activity.
Using these option strategies
Unusual options activity is an advantageous strategy that can greatly reward an investor if they are highly qualified, but for the less experienced trader it should remain another tool for making an informed investment decision while other observations are taken into account.
For more information on understanding option alerts, visit https://pro.benzinga.help/en/articles/1769505-how-do-i-understand-options-alerts
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