Monday, the actions of Nicolas (NASDAQ:NKLA) saw unusual options activity. After the option alert, the stock price rose to $ 20.79.

Three Ways Options Activity Is “Unusual”

One way in which options market activity can be considered unusual is when the volume is unusually above its historical average. Option activity volume refers to the number of contracts traded over a period of time. The number of unsettled contracts that have been traded, but not yet closed, is called open interest. These contracts are not yet closed because a buyer has not bought the contract or a seller has not sold it.

Another sign of unusual activity is negotiating a contract with an expiration date in the distant future. Usually, more time until a contract expires gives it more opportunities to reach its strike price and increase its time value. The time value is important to take into account because it represents the difference between the strike price and the value of the underlying asset.

Contracts with a strike price that is far from the underlying price are also considered unusual because they are defined as “out of the money”. This happens when the underlying price is lower than the strike price of a call option or higher than the strike price of a put option. These transactions are done because the value of the underlying asset is expected to change drastically in the future and the buyer or seller can enjoy a higher profit margin.

Bullish and bearish feelings

Options are “bullish” when a call is bought at / near the ask price or a put is sold at / near the bid price. Options are “bearish” when a call is sold at / near the bid price or a put is bought at / near the ask price.

These observations are made without knowing the true intention of the investor in purchasing these options contracts. Activity suggests these strategies, but an observer cannot be sure whether a bettor plays the contract up front or if the options bettor is hedging a large underlying position in common stocks. In the latter case, bullish option activity may be less significant than a large investor’s exposure to their short position in common stocks.

The story continues

Use these strategies to trade options

Unusual options activity is a profitable strategy that can greatly reward an investor if they are highly skilled, but for the less experienced trader, it should remain another tool for making an informed investment decision while taking into account other observations.

For more information on option alerts, visit https://pro.benzinga.help/en/articles/1769505-how-do-i-understand-options-alerts

See more Benzinga

© 2021 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.