Long-Term Options Better For Investing or

Trading?

Recently, we kicked off a new series for the OptionSIZZLE blog, it’s where you send me your most hard hitting questions pertaining to options investing.

I then share my answer to the entire OptionSIZZLE community…so everyone can get a chance to learn something specific to their current needs.

In today’s segment, we have an example of an options investor taking a trade based off unusual options activity.

Here it is:

Hi Joshua,

Sometimes I notice long term bullish calls being bought, six months out to a year. What do you think of these?

For example, I followed AMTD NOV $36 calls, I bought them and bad news was released shortly after and the stock price dropped quickly. I held it because it’s long term. But I don’t know if it is smart to follow these long term calls, or should I just ignore them?

First let me say, I love unusual options activity. In my opinion, it’s the world’s best indicator for giving clues on where the future direction of a stock price will trade (if analyzed correctly). What do I think about long-term plays based off unusual options activity?

I think they’re definitely worth exploring and offer a great deal of opportunity.

Before I get into it, let’s analyze your trade. On March 25, 2014, there was an order of 28,250 AMTD (TD Ameritrade) NOV 36 calls bought to open (it’s new position because there was zero option open interest).

The bid/ask spread was $1.85b/$2.15a and the options were bought for $2.05.

The average daily volume for AMTD (TD Ameritrade) at the time was around 3,800 contracts a day. On March 25, 2014 the stock traded over 36,000 options or 9 times usual options volume.

Also, the stock was trading around $34.80…making the options slightly out-of-the money.

With that said, congrats! You were able to detect the unusual options activity correctly.

However, this is just a starting point. If you recall from reading the FREE REPORT, you’ll know that you’ve got to awaken your inner detective to try to figure out why an order like that might have been placed.

Here are some of the questions I ask myself:Are they buying calls as a stock replacement (using option leverage and less capital) or is this a trade?

Do they have a short position in the stock and are hedging with long calls? (We can only make an educated guess on this)

Are they making a bet on the brokerage sector as a whole or is this isolated to just this stock?

Does this stock correlate with the overall market? For example, does the S&P 500 need to perform well for the stock to do so as well?

Is the company planning on making an acquisition or part of an M&A target?

How does the chart look? Has it been trending higher or lower…been in a range?

Is there an announcement or legal dispute expected to occur around or before the expiration period?

(Source: Trading View)The yellow highlighted area is the day the large call buyer came in.

Of course, there are more advanced considerations like record keeping, the spillover effect and accumulation…which are all outlined in full detail SIZZLE Method Report.

Since this is a longer term play, you have time to do this investigative work. Unlike near-term option plays which require quick thinking…and a shoot first and ask questions later approach.

After all, if they were expecting a quick pop, they would have bought near term options. Do yourself a favor and try to put the pieces of the puzzle together.

Sometimes the writing is on the wall, you just have to keep your eyes open.

What can we assume with this longer-term option position?

Probably not a bet on earnings since they were due to report in mid April.

If you watched How to Buy Options For Better Results, you’ll recall that the more time on an option, the more expensive they are.

With that said, they were willing to pay a higher premium for that extra time. As with long term investing, you shouldn’t be overly concerned with the daily fluctuations of the stock price.

Sure these are options and have an expiration attached to them…but they are six months away. That’s a lot of time…and the stock price can have several twists and turns during that period.

Moving On

It’s true the stock took a nose dive shortly after the calls were purchased. Why? Well, the entire brokerage sector got rocked following growing concerns about high frequency trading.

It didn’t help that Michael Lewis was going on a tour for his new book “Flash Boys”, claiming that the stock market was rigged.

Did any of you catch hid 60 minutes interview? Pretty powerful stuff, as an investor I would like some answers too!

Also, it didn’t get much better this month, on May 6th, Reuters was reporting that the SEC was probing brokerages over the handling of retail orders.

Bad timing or was this investor short the stock and hedging with long calls? It’s really hard to say.

One thing that is interesting… these options are still being held. There are over 30,000 contracts in open interest on the NOV 36 call strike.

Another thing that I would be watching is future activity in these options. At the time of this writing, these options were valued at $0.55 with a little less than 200 days till expiration.

If the large investor really believed in the trade, why haven’t they bought more of these options at a much cheaper price?.

Or if they stopped believing, why haven’t they cut their losses? Maybe they were short stock the whole time and are laughing all the way to the bank.

Now, you asked if I like longer term option plays and I wrote yes. If a trade appears to be bullish, I look to sell puts if the premium is rich or structure a spread position.

The question you should ask yourself… is can your capital be better placed elsewhere?

None of us have unlimited capital, so we have to pick the investments that we believe will yield us the best returns. Are you looking for quick trades? Or are you willing to stick it out (possibly months) in order to see the trade (potentially) work out?

You see, it’s all about how you decide to allocate your capital. Could your capital be working better in something else? To be honest, you spotted the unusual options activity correctly.

After you’ve done your investigative work, you then need to compare this trade with the other alternatives out there. There will be trades that will look like sure things… only to turn out to be losers.

With that said, you don’t want to put all your eggs in one basket.

And even though, these are informed traders making these sizeable bets, they are not always right and they don’t always make money. Maybe this was just an unlucky play for you. However, only time will tell.

By the way, how’s your capital working for you?

These are some really choppy markets we’re in right now (if you’re a trader). Is your main position in cash or are you trying to trade through these sloppy conditions?

I’ll be in the comments section hanging out if you’d like to share.

http://optionsizzle.com/lp/report/