If you’ve been involved in the stock market as a casual observer or perhaps as a participant, it’s likely you’ve heard about insider purchases and sales of stock. The word “insider” might conjure up visions of Gordon Gecko making a hostile bid for a company or dumping shares in a timely manner before news becomes disseminated to the public and much to the detriment of shareholders.
Most often though, legal insider transactions involving influential interests ranging from execs to important fund managers make for a less exciting story. Yet, that doesn’t mean those actions can’t yield potentially important clues as to future stock performance. They can, but just remember not to spread yourself too thin or umm, “skinny” with the latest and greatest ticker to shine in an ever-changing spotlight.
Similar hot-firing action can be found in the option market as larger traders buy calls or puts (typically) or sell calls and puts or transact simple and even sometimes exotic spreads. As with stock, in tracking the actions of larger interests, it’s important to consider whether the executed contracts were opening or closing. In general, opening trades carry greater influence than trades which wind down or close an existing position. The simple reason for this logic is a fresh initiation in the underlying instrument is clearly motivated by the desire to make a profit and the trader’s willingness to accept added risk to benefit.
Conversely, closing out an option position, much like with shares being sold out of inventory or short stock being bought back, can be more complex and the real motivation unclear. Maybe the party involved is buying the ranch, rather than betting the ranch or paying for the triplet’s tuition at Sarah Lawrence? In either one of those instances and all the others like them, the raising of cash due to non-market related circumstances is the primary consideration and the vehicle used to delivery those necessitated funds, a distant second.
We won’t knock tracking and then maybe following in the footsteps of larger interests in the market on occasion. But know this, even if it’s been determined a Big Cheese is opening in size, those actions can still be opaque as to their real intentions. Depending on the stock in question and trader, the fresh position could involve a hedge against existing stock or other options or something more esoteric like a volatility basket.
Finally and even on a quiet summer Friday, there’s just too many of these type situations to not think you’re going to be spreading yourself real thin and left hanging. Versus that other option of making a nice spread or two for yourself which you'll know and understand inside and out as a student of sounder trading practices; we know which method sounds like the hotter idea to us.
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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The information offered here is based upon Christopher Tyler’s observations and strictly intended for educational purposes only, the use of which is the responsibility of the individual.