Merrimack Pharmaceuticals, Inc. (MACK) a biopharmaceutical company is engaged in discovering, developing, and preparing to commercialize medicines paired with companion diagnostics for the treatment of cancer primarily in the United States. MACK is currently trading around $7.12 in a 52 week range of $2.05-$7.65. The company’s stock has been underperforming the market this year with shares falling year to date. Options traders seem to think that this trend will reverse as order flow in XYZ has been decidedly bullish activity yesterday as a trader bought 1700 MACK May 5 Calls for $.40 debit. Let’s breakdown their risk and how they profited $306,000 or 450% Returns overnight.
Yesterday a trader bought 1730 MACK May 5 Calls for $.40 debit.
Cash Outlay: $69,600
Greeks of this Trade:
Delta: Long
Gamma: Long
Theta: Short
Vega: Long
Today these Calls are trading $2.20, so let’s look at their profit:
$2.20- $.40 * 100 * 1700= $306,000
Unusual Option Activity:
We define unusual option activity as large block trades that represent a large percentage of daily option volume. The block trade is considered “unusual” if the option volume is above the average daily volume over the past 22 days. At KeeneOnTheMarket.com we scan and analyze order flow from all of the major options exchanges in order to identify any unusual option activity.
Analyzing unusual order flow gives traders a window into what the positions that large institutional players have. The majority of unusual option activity can be traced back to hedge funds, mutual funds, and other large institutions. Knowing where these institutions are placing their bets can be hugely advantageous for any trader. These institutions have informational and technological advantages that the average trader doesn’t have, and the amount of time and analysis that goes into every one of their trades is substantial. We offer this service through our 7 hour daily LIVE trading room http://bit.ly/135QWt8 or through Premium Twitter feed with all entries, exits, and unusual options activity tweeted all day long: http://bit.ly/11f0L9u .
Order flow can however at times be deceiving. One might logically thing that a large block buyer of calls is bullish on the underlying. This is not always the case. Remember that a large number of participants in the equity options market are hedgers. Long calls are a hedge against short stock, and long puts are a hedge against long stock. With this in mind we have developed a 7 step trading plan that helps filter out unusual option activity that will not provide actionable trade setups. It is by using this plan that we are able to identify the most significant unusual options activity trades every day.
Andrew Keene
KeeneOnTheMarket.com
