As an investor, there are various strategies that you can employ to maximize your returns in the stock market. For example, you’ve got a lot more to consider when it comes to penny stocks. Low-priced equities are prime candidates for high volatility and risk. But understanding that as an undertone in the stock market today will better prepare you to find a strategy that works.
How do you find the best penny stocks to buy now? One strategy that has gained popularity is using unusual options activity to your advantage. This term describes instances of an unusually high volume of trading activity on a particular option contract. This article will discuss unusual options activity and how to use it to your advantage.
What is Unusual Options Activity?
In the stock market today, options contracts give the buyer the right, but not the obligation, to buy or sell a security at a predetermined price within a specific timeframe. These contracts are often used as insurance against potential price movements in the underlying security.
Unusual options activity occurs when a particular option contract has an unusually high volume of trading activity. This activity can be in the form of large trades or a large number of small trades. This activity is considered “unusual” because it is significantly higher than the average trading volume for that particular contract.
How to Identify Unusual Options Activity
There are several ways to identify unusual options activity. One way is to use options scanners. These tools scan the market for unusual activity based on pre-set criteria. Another way to identify unusual options activity is to monitor the options chain for a particular security. The options chain lists all available options contracts, including their strike price, expiration date, and trading volume. By monitoring the options chain, you can identify contracts experiencing a significant increase in trading activity.
How to Use Unusual Options Activity to Your Advantage
Now that we’ve discussed what unusual options activity is and how to identify it let’s explore how you can use it to your advantage.
One way to use unusual options activity is to follow the “smart money.”An unusually high volume of trading activity on a particular option contract can be taken as a sign that institutional investors or traders with advanced market knowledge are taking a position. By following the money, investors can gain more insight into the market sentiment for a particular stock.
Another way to use unusual options activity is to take a contrarian position. In some cases, when there is an unusually high volume of trading activity on a particular option contract, it may be a sign that the market is overly bullish or bearish. Investors can profit from a reversal in market sentiment by taking a contrarian position.
Lastly, investors can use unusual options activity as a way to confirm their analysis of a security. If an investor has identified a security that they believe is undervalued and it has an unusually high volume of trading activity on call options, it may be a sign that other investors share the same belief. This confirmation can provide additional confidence to the investor’s analysis and may be a reason for them to add it to their penny stocks watch list.
This article looks at a handful of cheap stocks with unusual activity. We break down recent updates and discuss any upcoming potential catalysts to note. Then you can decide if they deserve a place on your list of penny stocks to watch this month.
Penny Stocks To Watch
Opko Health Inc. (OPK)
Shares of Opko Health stock have managed to rebound strongly since hitting 52-week lows in February. Since then, OPK stock has bounced back more than 40% since then, and recent corporate milestones have helped the move. Specifically, the biopharma and diagnostics company entered an exclusive worldwide license and collaboration agreement with Merck (NYSE: MRK). The two will develop the MDX-2201 platform, ModeX’s (an Opko company) nanoparticle vaccine candidate in treating Epstein-Barr virus (EBV).
In response to the development, ModeX CEO Gary Nabel, M.D., Ph.D., explained, “Targeting four proteins used by EBV to infect cells, this vaccine candidate embodies the novel multitargeting approach developed by ModeX scientists.”
Furthermore, details of the arrangement also include an upfront payment of $50 million to Opko. There are also potential milestones of up to $872.5 million plus royalties on global sales.
What else are traders monitoring in OPK stock? Recent insider buying by CEO Dr. Phillip Frost, valued at over $260,000, and unusual options activity are in focus. Regarding options action, the June 16th, 2023, $1 Calls saw the highest volume across strikes and expiration dates in the chain. More than 4,800 contracts were traded compared to fewer than 2,000 Open Interest contracts.
BlackBerry Ltd. (BB)
Communications company BlackBerry is back in focus this week. While share prices have steadily risen since the start of March, BB stock still has plenty to make up for, thanks to a recent sell-off. BlackBerry reported lackluster earnings preliminary results for Q4 and full-year 2023. The company said it expects to report declining revenue in the quarter, and overall, results would be below estimates.
“Macro challenges were a key factor for BlackBerry’s Cybersecurity business unit this quarter, with elongated sales cycles in government causing some large deals to slip into later quarters,” said John Chen, Executive Chairman & CEO of BlackBerry.
BlackBerry’s management also said it’s taking steps to balance investments and manage costs. Fast-forward a few weeks, and not BB stock could be back in favor after recent news alongside Adobe. The two partnered to deliver secure forms with electronic signatures on mobile devices.
Heading into the rest of the month, BB stock is on the list of penny stocks with unusual options volume. The April 6th $4 strike Calls saw more than 12,500 contracts traded as of this article. This was much higher than the 1,119 Open Interest at the start of the day.
Sirius XM Holdings (SIRI)
Another one of the “household stocks” on this list – aka notable brand names – is Sirius XM. The satellite radio and digital entertainment company saw its stock price increase on Tuesday. Shares have maintained a steady uptrend after SIRI stock hit 52-week lows earlier this month. A mix of job cuts, sector weakness, and overall bearish sentiment contributed to this year’s sell-off in the penny stock.
Nevertheless, some analysts have remained bullish on SIRI stock. Benchmark, for instance, reiterated its Buy rating this month. It maintains a $7 target, which is over 80% higher than current levels. Moreover, the options market has also presented some interesting action this week. The June 16th $4 stroke Calls saw the highest volume in the stock market today. More than 2,400 contracts traded, adding to an already robust amount of Open Interest across multiple strike prices for that expiration date.
Potential Risks and Rewards
As with any investment strategy, using unusual options activity to your advantage comes with potential risks and rewards. While identifying unusual options activity can potentially lead to profitable trades, it can also result in losses if the market doesn’t move in the expected direction.
You should also consider “selling to open,” which will also contribute to volume but not necessarily mean “call volume = bullish” and “put volume = bearish.” For instance, selling puts to open a trade is a more bullish type of trade but will add to the put volume. It’s up to you to research the kind of volume at play in addition to other market metrics.