One of the beautiful aspects of the derivatives market is that you don’t need to trade options to benefit from the underlying data; case in point is unusual options activity. Just like it sounds, this term represents options contracts that have seen aberrant spikes in volume relative to a benchmark metric, such as trailing one-month average volume.
Primarily, unusual options activity may suggest heightened interest in particular trades placed by the smart money. We’re talking professional traders or institutional investors. By monitoring specialized screeners for statistically significant activities – along with analyzing options flow or big block transactions likely placed by major entities – we can better gauge what Wall Street titans might be thinking.
Of course, there’s no one indicator that tells you everything. Admittedly, assessing the dynamics of the options market involves plenty of interpretation. That’s because we can only know so much. And like poker players, no one is going to show their cards.
Still, it’s a lot better than blind guessing. With that, below are key stocks to consider based on unusual options activity.
Grocery Outlet (GO)
What it is: Based in Emeryville, California, Grocery Outlet (NASDAQ:GO) is a discount closeout retailer. It consists exclusively of supermarket locations that offer deeply discounted, overstocked, and closeout products.
Relevance: Following the close of the Dec. 19 session, GO ranked among the top highlights for unusual options activity. Specifically, volume reached 3,688 contracts against an open interest reading of 3,794 contracts. That yielded a volume delta of 1,180.56% against the trailing one-month average metric. Call volume hit 3,572 contracts, yielding a put/call volume ratio of 0.03. Fintel’s options flow data shows heightened demand for $30 calls with expiration dates of Jan. 19, 2024 and Feb. 16, 2024.
Takeaway: As a discount grocer, Grocery Outlet offers significant fundamental pertinence. If economic conditions get squirrely, the company should benefit from the trade-down effect.
Risks: While GO makes sense on many levels, it also trades at a rich trailing-year earnings multiple of 34.47x. Also, analysts remain pensive, rating shares a consensus hold.
Apple Hospitality REIT (APLE)
What it is: Headquartered in Richmond, Virginia, Apple Hospitality (NYSE:APLE) is structured as a real estate investment trust (REIT). Per its website, the company owns one of the largest most diverse portfolios of upscale, rooms-focused hotels in the U.S.
Relevance: After the closing bell on Dec. 19, APLE represented another highlight in terms of unusual options activity. Specifically, total volume hit 4,336 contracts against an open interest reading of 7,676. Further, the delta between the Tuesday session volume and the one-month average metric came out to 1,068.73%. Call volume clocked in at 4,101 contracts. However, options flow data shows that most of these contracts were for sold calls.
Takeaway: Sold calls represent a risky trade because of uncapped loss potential. Since sellers have the obligation to fulfill the contract under exercise, they may be forced to buy APLE at higher and higher prices.
Risks: From a retail trader’s perspective, it might be tempting to short APLE due to the institutional sold calls. However, if bullish speculators jump in, circumstances could get ugly for the pessimists.
UBS (UBS)
What it is: Hailing from Switzerland, UBS (NYSE:UBS) is a multinational investment bank and financial services firm. Per its public profile, UBS maintains a presence in all major financial centers as the largest Swiss banking institution.
Relevance: After the close of Dec. 19, UBS ranked among the top highlights for unusual options activity. In total, the volume reached 59,911 contracts against an open interest reading of 456,106. Further, the volume delta between the Tuesday session and the trailing one-month-average metric was 1,048.82%. Further, call volume came in at 34,406 contracts, yielding a put/call volume ratio of 0.74. Options flow shows heavy demand for bought Feb 16 ’24 30.00 Calls.
Takeaway: Out of all major transactions on Dec. 19, the trajectory was only one way: buying the aforementioned call option. That’s not surprising given the stratospheric rise of UBS in the open market recently.
Risks: While UBS enjoys a moderate buy assessment, upside may be limited as the average price target is only $31.18.
The RealReal (REAL)
What it is: Headquartered in San Francisco, California, The RealReal (NASDAQ:REAL) is the world’s largest online marketplace for authenticated, resale luxury goods. Per its public profile, the company commands more than 34 million members.
Relevance: Following the end of the Dec. 19 session, REAL captured the spotlight for unusual options activity. In particular, total volume reached 14,048 contracts against an open interest reading of 54,116. The delta between the Tuesday session volume and the trailing-month average metric was 798.21%. Put volume dwarfed calls at 13,757 contracts. Per Fintel’s options flow screener, though, most of the puts were sold puts; specifically, the Feb 16 ’24 2.00 Put.
Takeaway: Sold puts put a wrinkle in the assessment because under exercise, sellers must buy the security at the listed strike price ($2). Now, it’s difficult to make a bold pronouncement of what’s actually happening here. However, the trade implies strong confidence that REAL won’t dip materially below $2.
Risks: REAL stock lost about 92% of equity value since its 2019 debut so you must be careful.
FedEx (FDX)
What it is: Based in Memphis, Tennessee, FedEx (NYSE:FDX) is a package delivery stalwart. As such, the company has its pulse on the consumer economy. Unfortunately, that might not be a great sign at the moment.
Relevance: Following the close of the Dec. 20 session, FDX was one of the top highlights in terms of unusual options activity. Notably, volume landed at 344,249 contracts against an open interest reading of 233,683. Further, the difference between the Wednesday session volume and the trailing one-month average metric pinged at 928.25%. Call volume was 152,230 contracts while puts hit 192,019 contracts. Options flow shows heavy demand for selling the Jan 19 ’24 260.00 Call.
Takeaway: FDX cratered during the midweek session after the company posted weaker-than-expected revenue outlook following a demand hit. That’s not encouraging in the least due to the fragile nature of the consumer economy. Therefore, going long FDX might be risky.
Risks: With the Federal Reserve hinting at possible interest rate cuts next year, you don’t want to be overly aggressive on the short side of FDX.
Yelp (YELP)
What it is: Hailing from San Francisco, California, Yelp (NYSE:YELP) develops its namesake website. Essentially, the company publishes crowd-sourced reviews about businesses. It’s valuable because consumers often make their decisions based on collective reviews.
Relevance: After the closing bell rang out on Wednesday, YELP found itself as one of the top names for unusual options activity. Specifically, total volume reached 3,920 contracts against open interest of 29,732 contracts. Further, the delta between the midweek session’s volume and the trailing-month average was 915.54%. Looking at options flow data, the big block transaction that stood out was 3,476 contracts bought of the Jan 19 ’24 43.00 Put.
Takeaway: At face value, that’s a massively bearish bet and in some ways, it might make sense due to YELP’s sustained bullishness. However, the problem is that there are several sold calls that are currently getting blown up. With the optimists threatened to panic out the bears, YELP is not something to be shorted right now.
Risks: In terms of risks for the bulls, the average analyst price target of $50.25 leaves little implied upside.
Mister Car Wash (MCW)
What it is: Arguably the oddball in this list of stocks printing unusual options activity, Mister Car Wash (NYSE:MCW) is exactly what it sounds like: a quick-service car wash provider.
Relevance: Following the end of the Dec. 20 session, MCW ranked number six in terms of unusual options activity based on volume. Specifically, the total volume reached 4,099 contracts against open interest of 3,318 contracts. Moreover, the difference between Wednesday’s volume and the one-month average was 1,041.78%. Call volume hit a sizable 4,069 contracts. Interestingly, Fintel’s options flow screener shows no big block trades in December, implying mostly retail demand for the calls.
Takeaway: Looking at the narrative broadly, Mister Car Wash doesn’t seem particularly remarkable. So, why the heightened interest in call options? It could come down to short-squeeze speculation. MCW’s short interest comes in at an elevated 13.67%. Also, the short interest ratio – the time needed to unwind all short positions – clocks in at nearly seven days.
Risks: If you decide to go long MCW, just be aware that analysts on average see no further upside.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
