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When the "smart money" wants to quickly, quietly and efficiently place a large bet on a stock's direction, they turn to the options market.
Since one option contract controls 100 shares of stock, buying options is one of the easiest ways to control a lot of shares with a (relatively) small amount of capital.
For instance, at the end of March, an unidentified trader came in and scooped up 30,000 contracts of Delta Air Lines (NYSE: DAL) May 50 Calls for $1.85 each ($185 per contract). In total, the trade cost $5.5 million and gave the mystery buyer control of 3 million shares.
Buying 30,000 contracts for a single trade is what I would consider a pretty substantial position. That's nearly the same number of contracts traded on Boeing (NYSE: BA) for the entire month of March.
I won't lie; it was the sheer number of dollars involved in the trade that initially caught my attention. But as I looked over the details, I found several other characteristics that made this trade even more interesting:
1. If DAL isn't trading above $50 when the options expire, the calls will be worth $0.
2. The trade doesn't break even until DAL reaches $51.85, about 9% above the current price. Unless the trader thought shares were going to explode to the upside, it would have been better to buy the stock straight out, which would generate a profit even if the stock saw a small gain.
3. These calls expire on May 20, which means the trader thinks shares will complete their big rally in the next 35 days.
In sum, for our trader's $5.5 million bet to pay off, DAL needs to move higher -- and fast! Not only is this bet big... it's also pretty bold.
Back when I was a member of the Philadelphia Stock Exchange, when trades like this occurred on the floor, it wasn't uncommon for the rest of us to coattail the trade by quickly buying some of the same options for ourselves.
The idea was if someone else was willing to drop millions on a single position, they'd likely gone to great lengths to vet the trade before committing. If their research was pointing in a certain direction, it could be worth the risk to follow suit.
As floor traders, we didn't always have the luxury of researching the pick, so we just threw in and hoped the high roller was onto something.
Since I left Wall Street, I would never just recommend a trade based solely on someone else's big bet. As much as I imagine our $5.5 million trader doesn't want to lose all of his or her money, I've seen crazier things happen on Wall Street. This is why it's crucial to do your own research before jumping into a trade.
But when I started looking into this DAL trade last week, my research turned up a tremendous fundamental opportunity, which I outlined in detail for my Profit Amplifier subscribers.
To summarize, the airline industry is healthy, Delta is fundamentally cheap and the stock has tremendous upside according to nearly every analyst that follows it.
This week, my research was validated when the airline announced a first-quarter earnings beat, as the decline in oil prices went a long way in helping the company cut spending and increase cash flow.
And while I must applaud our mystery trader's ability to sniff out a good trade, our friend didn't quite get everything right. I found an even better option to play a jump in DAL's price.
I can't reveal the specifics of the trade out of fairness to my Profit Amplifier readers, but I can say that it gives traders a much higher probability of success than this "high-roller" trade.
This just goes to show how understanding simple options strategies can help level the playing field with the so-called experts on Wall Street.
If you've ever considered giving options a try, I urge you to watch my six-minute training video. In it, I'll show you the two-part strategy that has made me a millionaire many times over and is delivering average annualized gains of 123% to investors just like you.
You can access it for free here.
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