From the desk of Steve Strazza @sstrazza
This is one of our favorite bottom-up scans: Follow the Flow.
In this note, we simply create a universe of stocks that experienced the most unusual options activity — either bullish or bearish, but NOT both.
We utilize options experts, both internally and through our partnership with The TradeXchange. Then, we dig through the level 2 details and do all the work upfront for our clients.
Our goal is to isolate only those options market splashes that represent levered and high-conviction, directional bets.
We also weed out hedging activity and ensure there are no offsetting trades that either neutralize or cap the risk on these unusual options trades.
What remains is a list of stocks that large financial institutions are putting big money behind.
They’re doing so for one reason only: because they think the stock is about to move in their direction and make them a pretty penny.
Then we flip through our list of stocks flashing unusual activity and pick the best setups using many of the same technical filters we do for our other scans.
And just like that, we’ll follow the money flow and fatten our own pockets along with some of the world’s most powerful financial institutions.
Whether the transaction was executed on the bid or the offer also matters. Which counterparty was the aggressor definitely matters. Without this information, we wouldn’t know whether the trade was a bullish or bearish bet.
For example, a massive amount of put contracts executed at the ask is a bearish bet (all else equal). But did you know that a bunch of these very same puts executed on the bid is actually bullish?
In this scenario, the seller is the aggressor as they are shorting the puts, which is similar to buying calls on the ask and betting on higher prices.
But no need to worry about any of this. We’re doing it all for you!
All you need to know is that we’ve designed a list of stocks that some of the largest firms on Wall Street feel very bullish or very bearish on.
Then we apply our technical analysis to identify asymmetric trade setups to follow them into some of these names.
Due to the nature of the catalysts applied to create this universe of stocks, most of these trades will tend to be on the shorter-term end of the spectrum. We’ll typically be looking to take profits a few months out at most.
But there will be some splashes whereby participants put on “leaps”–or other long-term strategies, which could warrant a longer timeframe.
Either way, after running this scan internally for years now, we’re confident we’ll find some great trade ideas on this list. Better yet, they’ll come from both the long and short sides.
In short, the idea for this universe based on unusual options activity is to follow the big money into some of their highest-conviction trades and profit along with them.
Of course, as with any stock we’re in, we’ll also have the primary trend at our back.
Here’s this week’s list of stocks with unusual options activity, powered by our friends at The TradeXchange:
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Our first setup of the day is the world’s largest uranium company, Cameco Corporation $CCJ:
JC mentioned this stock last week as it was breaking above former resistance to new multi-year highs. On Thursday and Friday, the stock appeared on our Follow the Flow list with back-to-back days of bullish options activity.
With such a nice chart and bullish options flow, we’d be remiss not to reiterate it today. Sean also put out an options trade on CCJ a few days ago, which you can read here.
Not only is CCJ working its way higher in a nice base on absolute terms. The relative trend is also completing a rounding bottom reversal that suggests the stock will continue to exhibit leadership.
We’re buyers on strength above 26 with a target of 44 over the next 3-6 months.
Our second setup is an $8B natural gas exploration and production company. Here’s Southwestern Energy Corp $SWN:
Southwestern Energy has built out a rounding bottom formation over the past four years. Last week, price pierced through the upper bounds of this base, marking a major breakout to new multi-year highs.
While there is more work to do on a relative basis, SWN just reclaimed a key level of former resistance versus the broader market.
It’s currently trading at multi-year highs on both absolute and relative terms. There’s a lot to like about this setup right now.
As long as we’re above 6.60, we can own SWN with a target of 10 over the next 2-4 months.
We hope you enjoyed this post. As always, we want to know what you think about our report, so shoot us a note with some feedback!
Good Fishing.
Allstarcharts Team