$DISCK Unusual Options Activity - Analysis + Trade

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.

Updated chart: D1 200EMA taken out

Another spread went off on MON @ 12:04:16. I can’t tell the bias on this one b/c the short leg went off b/w bid/ask. Analyzing either side though has led me to believe that maybe there is some risk to the upside here now. Regardless- they’re continuing to up their vega exposure planning for vol to come into the market.

On top of that, someone came in yesterday (Tuesday) and went straight on the offer 9,500 contracts @ $0.25 for the MAY 25 Puts. This looks like protection to me.

How do we know these were opening trades, and, not this guy legging out of the short side of the spread?
Here’s the intraday volume chain from yesterday (Tuesday):

Here’s the open interest update for today’s chain (Wednesday):

You can see we went up ~10k to 30k open, meaning, that additional 9.5K on the ask was to open.

We’ll have to wait and see how the next 7-10 sessions play out- only then do I think we’ll be able to determine whether or not this was a hedge, or, someone moving on insider information that the stock is going to be in for additional trouble.

Earnings are slotted for WED 4/28 BMO- not sure why I said 5/5 in my original post. Let’s see what happens b/w now and then.

Jake

After thinking about this one more + seeing that additional $7.5MIL commitment, I think I got a little too short and maybe the landscape has changed in the near-term. This AM I was -135 deltas and only @ 7 vegas. I wanted to try and get neutral on the original put spread - so, considered buying stock, but, it’s actually more capital efficient, and, less risky to buy calls outright.

That being said, I hedged off nearly all the deltas and nearly tripled my vega exposure, which I’m actually starting to like more about this trade. If vol is inbound, I want to see option premiums increase and hopefully not worry about direction. There is obviously gamma risk, but, my curve at this point is more like a long straddle.

I do have theta working against me here, but, theta is the weakest component/input to an option price- especially if I’m > 30 days out.

I picked up the front cycle 35 calls. Here’s my new risk curve:

You can see the straddle-like profile here. I did have to take on a few hundred dollars more risk (in relation to the original put spread), but, this is more a pure vol play at this point
Delta is near neutral.
Gamma is high, which is good b/c we want the stock to move.

Obviously, all of these metrics are snapshots in time, and are 100% subject to move when the product moves.

Jake

Thanks for all the analysis! Talking about the product movements and evaluation, well, that goes for every product. You can take advantage of your analysis in real-time. If you think that you will evaluate the market today and use the result some other day to enter or exit a trade, it won’t work.