Unusual Options Activity Insight: iShares Russell 2000 ETF

iShares Russell 2000 ETF IWM shares experienced unusual options activity on Thursday. The stock price moved up to $224.18 following the option alert.

• Sentiment: BEARISH
• Option Type: SWEEP
• Trade Type: PUT
• Expiration Date: 2021-08-20
• Strike Price: $228.00
• Volume: 652
• Open Interest: 1331

Three Signs Of Unusual Options Activity

Exceptionally large volume (compared to historical averages) is one reason for which options market activity can be considered unusual. The volume of options activity refers to the number of contracts traded over a given time period. The number of contracts that have been traded, but not yet closed by either counterparty, is called open interest. A contract cannot be considered closed until there exists both a buyer and seller for it.

The trading of a contract with an expiration date in the distant future is another sign of unusual activity. Generally, additional time until a contract expires increases the potential for it to reach its strike price and grow its time value. Time value is important in this context because it represents the difference between the strike price and the value of the underlying asset.

Contracts with a strike price far from the underlying price are also considered unusual because they are defined as being "out of the money". This occurs when the underlying price is under the strike price on a call option, or above the strike price on a put option. These trades are made because the underlying asset value is expected to change dramatically in the future, and the buyer or seller can take advantage of a greater profit margin.

Bullish And Bearish Sentiments

Options are "bullish" when a call is purchased at/near ask price or a put is sold at/near bid price. Options are "bearish" when a call is sold at/near bid price or a put is bought at/near ask price.

These observations are made without knowing the investor's true intent by purchasing these options contracts. The activity is suggestive of these strategies, but an observer cannot be sure if a bettor is playing the contract outright or if the options bettor is hedging a large underlying position in common stock. For the latter case, bullish options activity may be less meaningful than the exposure a large investor has on their short position in common stock.

Using These Options Strategies

Unusual options activity is an advantageous strategy that may greatly reward an investor if they are highly skilled, but for the less experienced trader, it should remain as another tool to make an educated investment decision while taking other observations into account.

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