- Ticker: PTON
- Sentiment: BULLISH
- Trade Type: CALL
- Moneyness: Out of the money
- Expiration Date: 2020-09-11
- Strike Price: $90
- Stock Price: $85.66
- Volume: 11,557
- Open Interest: 6,504
- Notes: new position since volume > open interest; bought on the ask
One way to analyze unusual options activity
There is a system that is coined by a prop trader from CBOE called OCRRBTT. What exactly is it? it is touted as a is a way to trade unusual options with maximum confidence and minimum risk. It stands for Open Interest, Chart, Risk, Reward, Breakeven, Time, and Target. Every trader who enters a trade based on unusual options activity should do a quick run through of the following
Open interest: The first thing you need to look at is if the trade volume is bigger than the current open interest in that line. If it is, this means that this is an opening position and is worth taking a look at. You don’t want to buy an option on unusual activity if it is really just paper covering a short. Only consider trades where volume is greater than open interest.
Chart: This is the second most important element of the plan. Once an unusual order is confirmed to be an opening order you must then look at the chart of the underlying stock. You need to ask questions. Is the stock in a strong bullish or bearish trend? Is there support or resistance at the strikes the institution is trading? Is it more likely they are speculating on more upside or downside or could they be hedging? The answers to these questions will help you determine if the trade is speculation or a hedge. This will keep you from trading against the institution when you actually want to trade with them.
Risk, Reward, and Breakeven: Once the direction of the trade is determined, you have to evaluate if the risk vs. reward profile of the trade the institution executed is in line with your risk tolerances. Some trades they take could be far too risky for the average retail trader. However, since you know the direction the institution is betting, you can tailor a trade that has the right risk setup for you. The risk of each trade must also be measured against the potential reward. If the institution is risking $5 to make $1, this is a trade you would want to avoid. You should also always be aware of the breakeven of each trade. If there is significant support or resistance at the breakeven point, you may want to consider another strategy.
Time and target: Always be aware of potential catalyst events that might be near. You want to know if paper is playing the overall direction of the stock or if they are playing a near-term catalyst event like earnings, drug announcements, or new product launches. This might factor into your decision to take the trade or not. Once you have your time horizon set, you want to pick a profit target. Are you leaving this trade on to expiration? Taking off half at a double and letting the rest ride? Knowing the answers to these questions at the onset of the trade make it easier to manage going forward.
Putting the Plan to Work
Once a trade hits the tape, a trader must use the OCRRBTT trading plan to analyze the setup and determine if it represents an actionable trading opportunity.
If a trader reviews all of these rules, it is much easier to manage a position and will ensure that risks are hedged and accounted for. A good trader thinks how much they could make. A great trader knows how much he can lose.