Greetings fellow traders,
Felt like sharing a recent trade.
Picked up unusual option activity on $DISCK.
Ticker was at the center of some recent hedge fund blow ups.
10:30 AM EST yesterday (Wed April 14) someone put up > $4mil to build this put spread for a net debit of $2.00. These types of trades are the purest form of “following the big money”, aka riding the waves of the big guys. It’s not always a home run as you need to apply some detective work to try and understand their rationale. You can see the two orders executed simultaneously (thus it was a spread). You can also see where the orders were filled in comparison to the bid/ask at the time of execution- which is how you back into their overall bias.
They bought the 32 halves for $2.32- almost hitting the ask.
They sold the 25’s at $0.32- close to the bid.
This was routed for a net debit of $2.00.
Open interest on the 32 halves finished at around 35k; on 25’s @ 50k- so there is a huge amount of money tied up in this product currently!
The position is:
Short delta, long gamma, short theta, long vega
I put on the same position for roughly $2.00 as well
Risk to reward is is a little better than 1:3
Implied volatility is trading around the 65% percentile, which is elevated
Simple probability distro based on current prices
The trade goes all the way out to JUN expy so you have some duration
Would be looking to take the trade off if:
(A) we book 25% of max profit in the next few days or so
(B) some point in May- currently have about a 65% chance of profitability - don’t want to hold thru June
The caveat with “unusual options activity” is you don’t know if this guy is just getting cute and hedging a larger position. The BPR (buying power reduction) of the trade is $4mil - how much the guy had to put up. If they were risking 3% to hedge, that’d be roughly $150mil in stock, or 4.6 million shares.
The largest stake in Discovery is Vanguard @ 31mil shares. #10 is Hudson Bay @ 4.6mil exactly. So, I don’t think it would be unreasonable to think this is someone adding short deltas, or maybe even a pure directional play-- we just won’t ever know, even after the action plays out.
The chart is looking scary too.
Currently sitting on the 200EMA @ 32.32 with volatility coming in a bit as of late.
Earnings are slotted for 5/5, so that could be a catalyst- may see some choppiness until then.
If that 200 gets taken out, things can get messy.