Huge Activity In DAL Might Be Hedging Short Stock

Delta Air Lines, Inc. (DAL) provides scheduled air transportation for passengers and cargo throughout the United States and around the world. The Company’s route network gives it a presence in every domestic and international market.  DAL is currently trading around $36.18 in a 52 week range of $22.71 – 42.66. The company’s stock has been outperforming the market this year with shares increasing 31.92% year to date. Today, a trader bought 20000 DAL Dec14 40.0 Calls for $0.90. This order involves this trader laying out $1.8 million in total premium.

While this huge bet looks bullish on the surface, it is possible that a trader is hedging a short stock position in DAL. The stock traded 7.2 million shares today, and this order controls 2 million shares. While this is a very large order, it is not necessarily ‘unusual’. DAL crossed below the 200 day moving average of $35.50, changing hands as low as $35.18 per share. Also, if we look at the Ichimoku chart using the 5-minute bar, we see that DAL is trading below the Cloud, indicating downward momentum building in the stock. Therefore, this order could indicate bearish sentiment on the stock, which is confirmed by the Ichimoku Cloud, or could indicate that a trader is rolling a bullish position out to December.

Unusual Option Activity:
We define unusual option activity as large block trades that represent a large percentage of daily option volume. The block trade is considered “unusual” if the option volume is above the average daily volume over the past 22 days. At we scan and analyze order flow from all of the major options exchanges in order to identify any unusual option activity.

Analyzing unusual order flow gives traders a window into what the positions that large institutional players have. The majority of unusual option activity can be traced back to hedge funds, mutual funds, and other large institutions. Knowing where these institutions are placing their bets can be hugely advantageous for any trader. These institutions have informational and technological advantages that the average trader doesn’t have, and the amount of time and analysis that goes into every one of their trades is substantial. We offer this service through our 7 hour daily LIVE trading room or through the only Unique Unusual Options Activity Scanner:

Order flow can however at times be deceiving. One might logically thing that a large block buyer of calls is bullish on the underlying. This is not always the case. Remember that a large number of participants in the equity options market are hedgers. Long calls are a hedge against short stock, and long puts are a hedge against long stock. With this in mind we have developed a 7 step trading plan that helps filter out unusual option activity that will not provide actionable trade setups. It is by using this plan that we are able to identify the most significant unusual options activity trades every day.

The Trade:
Buying the DAL Dec14 40.0 Calls for $0.90
Risk: $90 for every 1 lot

Greeks of this Trade:
Delta: Long
Gamma: Long
Theta: Short
Vega: Long