Trading price direction or volatility?

  • INCY options volume heavy Friday and Monday
  • Traders opening or liquidating?
  • Price-neutral trade vs. leveraged “synthetic” position

Monday may have been a low-day start to the week for the overall market, but as is always the case, there was plenty of activity below the calm surface of the major indexes.

For example, Incyte (INCY) had some of the day’s heaviest relative options volume—around 33 times average, with matching 6,000-contract trades in the June $75 calls and puts:

Chart 1: Incyte (INCY) June options, 6/10/24. Large matching trades in $75 calls and puts.

Source: Power E*TRADE (For illustration purposes. Not a recommendation.)

Traders who noticed the open interest (OI) in the $75 call was 6,100 while the OI in the $75 put was 6,000 may have suspected a large trader was liquidating a large straddle in options that were set to expire in less than two weeks.

That could be the case, but a couple of pieces of the puzzle raised other possibilities. First, both options traded around 6,000 contracts on Friday, June 7, too. That would suggest a trader who may have initiated a straddle was getting out of it a day later—not impossible, but perhaps surprising, since the stock didn’t move much on Monday. Second, straddles typically use at-the-money options (i.e., near the underlying stock price), and INCY closed below $60 on Friday and Monday.

Today’s OI totals will clarify whether Monday’s trades were trade liquidations or expansions. But even if the OI totals are higher—meaning, traders were opening new positions—that still doesn’t mean the 6,000-contract trades represent a large straddle.

They could also be a large “synthetic” position. For example, buying a call and selling a put with the same strike price and expiration creates a position with the same risk-reward profile as a long stock position. Reversing the trade—selling the call and buying the put—creates a “short synthetic,” which mimics a short stock position. One reason a trader would use a synthetic position instead of buying or selling the underlying stock would be the lower margin requirement.

INCY is currently trading around halfway between its January high and its late-April low. Shares have edged higher in recent weeks since jumping after the company announced a stock buyback on May 13:

Chart 2: Incyte (INCY), 10/31/23–6/10/24. Near midpoint of 2024 range.

Source: Power E*TRADE (For illustration purposes. Not a recommendation.)

Was a trader making a non-directional volatility trade (straddle), or establishing a bullish or bearish synthetic position? Or was a trader scratching a position made a day earlier? This is a snapshot of a fluid situation—today’s activity could cast the INCY positions in a completely different light. But on Monday it appeared that a large trader (or traders) could be planting a short-term flag in this stock.

Market Mover Update: On Monday, Centene (CNC) closed lower for the sixth time in the past eight days (see “Listening to volatility”). With nine days until June options expire, Sarepta Therapeutics (SRPT) isn’t significantly lower than it was on May 24 (see “Stock quiet, options make noise”).

Today’s numbers include (all times ET): NFIB Small Business Optimism Index (6 a.m.), FOMC meeting starts.

Today’s earnings include: Oracle (ORCL), Academy Sports & Outdoors (ASO), Casey’s General Stores (CASY), Rubrik (RBRK).


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