I trade Unusual Options Activity (abnormal volume in calls or puts) because more often than not, these trades result in a stock making a major move.
Today we saw a trader buy over 3,000 KHC January 47.5 Calls for $1.35 debit. This order cost over a $350,000. Each contract entitles the option buyer/owner to buy 100 shares of the underlying stock upon expiration. KHC has an ADV (Average Daily Volume) of 5,560,000 shares.
I hypothesize that this trade could be a hedge against a short stock position because after looking at the chart, I see that the stock continues to make lower lows and lower highs on the daily chart.
However, we never know for sure if a trader is buying Calls for Speculation to the downside or a hedge against a short stock position. Which is why when I decided I wanted to enter this trade, I did so using a Calendar Spread, in order to lower my cost basis.
I bought the January-December 47.5 Call Calendar Spread for $1.05 debit. This means I bought the January 47.5 Calls and Sold the December 47.5 Calls, hoping the stock does not move much in the next couple of days.
