Found in the Flow - Options Strategies & Unusual Options Activity in Square, Inc. (SQ)

Found in the Flow - Options Strategies & Unusual Options Activity in Square, Inc. (SQ)
Pictured above is an example of this strategy built in the TastyTrade broker, visualized with their trading analysis tool. N.B. The sold put and call at the $210 strikes are overlaid atop one another.

A Review of Unusual Options Activity & Whales’ Strategies in Square, Inc. (SQ)

Friday, September 10th, 2021, we reported on unusual options activity on Square, Inc., which saw a high at $253.93 and had opened at $253.01.

Earlier in the morning of the aforementioned report, there were orders representing over 2,100,000 shares, and were positioned as a bearish strategy, if they were all traded together as such.  The orders were:

  • 5,250 contracts traded on the $210 strike call option at the bid, dated for September 17th, 2021, representing approximately 525,000 shares.
  • An additional 5,250 contracts traded on the $260 strike put option at the ask, dated for November 11th, 2021, representing another 525,000 shares.
  • And finally, there were another 5,250 contracts traded on the $260 strike call option at the bid, also dated for November 11th, 2021.
  • There were an additional 5,250 shares not previously reported; this position represented a $105,000 premium in total and used as further underlying protection, dated for September 17th, 2021, likely at the whales’ spot price of the shares they held.
Seen above is the strategy from the Unusual Whales Flow.

The estimated returns on this overall strategy would be as follows:  there would have been a $18,312,000 net credit collected at the time of entry; there would be an infinite risk if and only if Square, Inc. moved beyond its upside cap at a spot price of around $252.31, where it would breakeven, and there would be no risk to the downside.  

There was a 62.2% probability of profit overall, with approximately a 42% chance of collecting at least 50%.  The maximum return would be expected as Square, Inc. 's underlying approached the $158.63 price.

Pictured above is an example of this strategy built in the TastyTrade broker, visualized with their trading analysis tool. N.B. The sold put and call at the $210 strikes are overlaid atop one another.

However, in order to have entered this strategy at all, one would have needed approximately $11,203.50 buying power, with margin, per set of contracts.  While some might not shirk such an expenditure for a strategy such as this, there are perhaps other ways to capitalize on the Flow, particularly when whales are making such strategic orders as these.

One Retailer’s Strategy to Take Advantage of the Flow

An example of a way to take advantage of momentum within put option derivatives, or bearish flow of this nature, would be to sell them with the trend--if and only if you anticipated a correction, or that the Flow would return to being bullish in a matter of time.

Historically, overall, markets tend to move up and to the right!

While this might surprise some, this can be a powerful strategy that has not only momentum but time on its side.  

One trader on Twitter, linked here, sold the $240 strike put option dated for October 15th, 2021 and purchased the $230 strike put option contract, for the same date, representing a bullish sentiment.  This is called a put credit spread, as compared to a put debit spread where the lower strike would have been sold, and the higher strike purchased, representing a bearish sentiment.  

Some retail traders might not be used to selling short against the direction, and collecting premium on a strategy, but this opens up to significant advantages:

  1. That the point at which losses are incurred are in the seller’s favor, in that the credit collected is added to the purchased strike.  In this instance, that would mean there is approximately $0 loss on this strategy up until Square, Inc. reaches $237.21, which is the $721 (7.21 collected in credit) added to the $230 strike.
  2. Time decay, or theta, would be on the seller’s side, as these orders were 35 days to expiration, and theta begins to rapidly decay against the buyer, meaning on this strategy every day the seller is gaining approximately 1.82 simply from holding the contracts.
Pictured above is an example of this strategy built in the TastyTrade broker, visualized with their trading analysis tool.

As can be seen, there is a maximum profit, which was the premium collected from entering into the put credit spread, which will be retained so long as Square, Inc. closes at or above the $237.21 breakeven spot price.

While this is a bullish methodology against a bearish whale strategy, that is because this trader might not anticipate Square, Inc. to maintain a bearish direction for long--and selling puts to collect premium can be a powerful decision for someone more experienced, even when going against the Flow.

Why We Choose to Go Against the Flow

However Rarely & Why

While the whale's four-legged strategy explained above was overwhelming bearish, it must be recognized that the whales were betting differently than other traders with lesser capital or those making smaller bets.

Seen above are the options flow of minimum premiums of at least $30,000.

The majority of betting today of minimum premiums of $30,000 or more of the topmost 250 positions were on the September 16th, 2022 expiration, with $31,298,800 premium traded.  The most active strikes were at the $250 price, amounting to $20,033,330 premium.

Seen above are the options flow of minimum premiums of at least $1,000.

However, seen above, for betting of premiums of $1,000 or more of the topmost 250 positions, there is a different sentiment, wherein the most active strike was $250 with bullish premium leading, and the most active expiration was the date of September 17th, 2021.  

As this was realized, it became evident that there might be a consideration for a short-term return to a mean, or above an exponential moving average, as Square, Inc.'s price has continued to decline.  Given this analysis, taking on a put credit spread to capitalize on the higher premiums during a downtrend was a consideration worth making.  

If this was indeed a "local floor", the 35 days until expiration will, as stated previously, play into a contract seller's favor; this means a bullish position could reasonably be taken while still going against the overall highest premium whales who were betting bearishly.

The above chart shows Square, Inc.’s price, in blue, since around June 23rd, 2021; call volume is represented in green, put volume in red, and open interest in yellow.

As seen, call and put volume have begun to trend upwards, while Square, Inc.’s price continued to come down; however, open interest has not significantly changed since September 9th, which reveals there is still as much betting or contracts being traded.  This alerts us that all sides are playing, just that the unusual options activity can inform of us inclement trends or shifting of sides being taken.

In conclusion, sometimes the largest of whales are conducting a strategy that can inform us of something--such as an insider move or an encroaching catalyst--but not all whales can be followed.  Sometimes we must break the Flow down between its requisite parts and make considerations that might be difficult, especially if we wish to collect premium from it.  

The difficult decision to sell against the Flow in order to maximize the chances of returns while there is a downward trend must not be taken lightly, and a larger-scope understanding of market trends and the ability to hold contracts anticipating a correction must be had.  Know your strategy and always be willing to ask for help!