Most traders know of buy-writes in terms of our recent XPO Logistics (XPO) trade. We bought stock and sold the May 45 Call. For every 100 shares purchased, we could sell one call.
However, there are other ways to execute buy-writes.
Today, a trader sold 22,000 eBay (EBAY) April 56.5 Calls (exp. 4/24) and bought 1,122,000 shares of stock for 56.55. In a “typical” buy-write, this trader would have bought 2,200,000 shares to make the trade 1x1. Instead, the trader was putting on a “delta neutral” trade, which has a low volatility/marginally bullish bias. (Please note that I made a small error on the amount of stock bought in my daily earnings report sent earlier today regarding eBay; it has been corrected on the website).
With EBAY trading at 56.55, the April 56.5 Call has a delta of 55. To make his trade delta neutral, or to not have a significant directional bias, the trader had to buy approximately 1,210,000 shares. The math behind this is 22,000 (amount of calls sold) multiplied by 55 (delta) equals 1,210,000.
With this trade, the trader is looking for EBAY to make a small move on this evening’s earnings.
We recently put on a bullish position after spotting repeated bullish call activity. As soon as I sent the alert, my scanner picked up on several large put purchases in this stock.
Initially, I was furious with my bad luck. But then I dug a bit deeper into the trade and noticed that the put purchases were labeled buy-writes. This is another type of buy-write ... the simultaneous purchase of a put and purchase of the stock.
For example, a trader could buy 10 Tesla (TSLA) 220 Puts for $11.00, and at the same time buy 1,000 shares of stock at 220. While the purchase of the puts is bearish, the purchase of 1,000 shares gives the trade a bullish bias. If TSLA goes down, the trader will make money on the puts, but lose on the stock position. However, if the stock goes up, the trader will lose on the puts as they will expire worthless, but will have unlimited upside exposure because of the stock purchase. When a put is purchased and the stock is purchased 1x1, it’s a bullish trade.
Having dug deeper into the put purchases I mentioned above, I was able to find that the trader had bought stock 1x1 with the put purchase, which made his trades bullish in nature, and that gave me continued confidence in our trade.
On Twitter, and other various forms of social media, I often see traders chasing every big order that hits the marketplace. This is a huge mistake! These traders are often putting on the exact opposite positions they should be executing.
For example, had I followed the sale of the eBay calls today, I would be putting on a bearish position, when the huge trader was putting on a neutral to marginally bullish position. Or, had I chased the put purchase mentioned above, I would put on a bearish position, when this large trader was putting on a bullish position.
In my daily emails, when I highlight bullish/bearish order flow, rest assured that I have done the due diligence to confirm that there was not stock tied to the trade.
If you ever see a large trade and want me to dip deeper into it, please don’t hesitate to email me.
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