Finding Sentiment Clues in Weekly Options


Andrea Kramer Image Andrea Kramer Associate Editor, Schaeffer's Investment Research, Inc.

Andrea Kramer of Schaeffer’s Trading Floor Blog explains why watching option volume can give you clues about the future direction of any stock.

Standard monthly and weekly options are a great tool for getting tips on trader sentiment about specific stocks, sectors (via ETFs), and even the overall market.

For example, short-term options traders are targeting Alpha Natural Resources (ANR) today, with near-the-money weekly options garnering notable attention.

  • Yesterday by midday, the weekly 8 strike had seen about 550 calls and 480 puts change hands—mostly at the ask price, suggesting they were bought.
  • Implied volatility (IV) on the call side was last seen 1.1 percentage points higher, while IV on the put side is up 3.4%, hinting at fresh initiations.

By purchasing the 8-strike calls to open, the traders are expecting ANR to rebound by the end of the week. On the other hand, the put buyers are betting on an extended decline for ANR. Currently, the stock is dancing just north of all-time-low territory, after sector peer Patriot Coal Corporation (PCX) filed for bankruptcy.

From a longer-term perspective, ANR has given up about 82.5% during the past year, guided lower beneath its ten-week and 20-week moving averages, which have stifled all but one of the stock’s weekly advances since late April 2011.

More recently, the security has underperformed the broader S&P 500 by 48% during the past 60 sessions, and touched a record nadir of $7.46 late last month.

Click to Enlarge

Option trading volume information, combined with simple fundamental analysis, can give any trader great insight into how the crowd believes a stock will perform in the short-term.

Despite ANR’s technical troubles, or the fundamental concerns surrounding the coal industry of late, Wall Street remains surprisingly enamored of the stock.