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By request, here are my thoughts about the

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SamuraiProgrammer   Thursday, 07/22/21 02:40:53 PM
Re: lodas post# 663998
Post # of 673322 
By request, here are my thoughts about the August options. IN NO WAY am I making recommendations. I am talking about how things work and interested in seeing how well those predictions hold. I am writing down my thoughts as I think this through. It will be long, but I hope it will be instructive.

TLDR; I think this indicates a breakout to the upside from the 4 month channel is likely. ALSO READ THE STUFF IN RED BELOW

A very VERY successful trader (hundreds of millions in career profits) once told me that understanding why people are making trades is the first step in figuring out what is going on behind the scenes. Then you will know (sooner rather than later) who is wrong and jump on the other bandwagon.

Lets look at this by figuring out why these trades have been made.

The first thing to realize is that the vast majority of options are at the $35 strike. I find that interesting. If one looks at a 6 month chart they will see that the price has been in a channel mostly contained between about 31.5 and 35.5.

Considering the open interest is so large at this strike price, I don't think the bulk of the trades are just option speculators on both sides (i.e. both the buyers and sellers). One side of the trade is (IMO) heavily populated by someone 'protecting' against something.

Lets look at the puts first.

The $2 premium for the $35 strike was not available at the time most of these positions were put on. The premium was between $2.15 and $2.55 on the day with the most volume so lets use a price of $2.35 for our analysis.

Short Puts

Put sellers are willing buyers at the strike price, or at least they had better be because that can happen. With a premium of $2.35, these people are willing to pay $32.65 ($35 strike less $2.35 premium received) so why not just buy it? The bulk of these positions appear to have been laid on around July 13/14 and sub $33 prices were available on those days.

This tells me the put sellers feel that either (1) the price will be somewhere above $32.65 at expiration (making this trade profitable), (2) they are willing to sell aggressively if the price goes down (to offset the requirement to buy the stock at $35 if it is below that price), or (3) They already have a short position and want to close it without running the price up (with offsets from option expirations).

IMO, #3 does not fit into this specific situation. There have not been a lot of chances to put short positions on at a price above $35.

Of the three choices, I think it is most likely #1 or #2. The sellers of this put are mainly those trying to collect a premium and/or are willing (and able) to defend the position.

Long Puts

Put buyers, IMO, are those who are trying to protect against the price going down and are using this as a mechanism to close their positions gracefully. That is to say, if they start selling, it will make the price go down faster and they are afraid they will get less than $32.65 for most of their shares.

Puts In General

Thinking about the breakdown of participants, I can't help bring another idea to the mix. With the lawsuits (finally settled, I think) and the rumors outed in those suits (at least the first one filed in SDNY), the broader range of COOP participants may be nervous about a short, sharp decline. Those who may have long shares in a margined account need to be particularly concerned and may be using puts to protect against that.

Without the consideration of such a possible monumental event that artificially pushes the COOP price down, I don't (IMO) see the puts indicating anything. In a calm environment, I would expect the sellers to try to defend the strike price (i.e. buy COOP stock pushing the price up) if they feel they can accomplish it. On the other hand, if something large happens, they will sell as hard as they can to cover their need to purchase at the strike price.

Now lets look at the calls.

The bulk of the calls appear to be put on around July 8. The highs of that day are comparable to today's price as I write this. The premium at that time was $0.85 to $1.65 at that time so lets use $1.25 for our analysis. Also it is important to realize that there are roughly 6 times as many calls as puts open at this time. Theoretically, that means that any inference we get from the calls would be 6x more important that that from the puts.

Long Calls

I think the long call buyers are either (1) speculators trying to leverage their money or (2) short holders that are trying to protect against a spike. In both cases, it betrays an expectation or fear that the price will rise.

Short Calls

The call sellers are probably mostly those trying to make some extra by selling calls. I can't think (at the moment) of any other reason I would do this. (Normally, there is the possibility of straddles but since they involve either buying both puts and calls or selling both puts and calls and the call open interest is so very lopsided, I don't think it applies here).

So call sellers are either selling covered calls (willing sellers at $36.25 (strike plus premium)) or, again are willing and able to defend their position.

Calls In General

I think this volume of calls (considering the possible motivations of the participants) indicates that there are those who truly believe the price may go up. I say this because 3 of the 4 possibilities include participants who either think the price will go up or are willing and able to deal with it if it does.

Final Analysis

Since the result of my thoughts about puts is rather neutral and the calls dominate in open interest, I think that this betrays market sentiment that the price will go up by expiration.

What does that mean in the bigger picture? The stock has been in a fairly tight channel for several months. There is nothing that indicates any directionality once it breaks from this channel. Furthermore, when it breaks (assuming no great news event), I would expect a new channel to form (roughly) at $30.00 to $32.50 OR $35.00 to $37.50. No news here, carry on.

But I keep thinking about how the calls outweigh the puts. 6X is a lot. It is possible that the 'big boys' will do what they can to keep the price from rising above $35 but if they are the ones buying the calls from retail covered-call sellers, I can see the price rising.

My interpretation is that the options activity indicates a market sentiment that when this channel breaks, it will break to the upside AND that this breakout may occur within the next month.

HOWEVER - I AM NOT RECOMMENDING THAT THIS BE A BASIS FOR TRADE DECISIONS. It will take some news event to make this move out of the channel.

The news event could be anything:

1) COOP starts acquiring stock (what if they are the option buyers?)
2) COVID gets worse
3) COVID gets better
4) Insert generic global news item here
5) The rumors of distribution and acquisition of the corpse of WAMU turn out to be true.

There it is. Thanks if you read this all the way through.

Terms I may have not explained properly:

Offsets - If you have an obligation to buy or sell due to having sold options (respectively puts and calls) and you cover those obligations with opposite positions already held. For example, a put seller may be obligated to purchase shares. If the seller is already short (in the stock), these purchases will simply close the position they have open already - the same as buying back their short positions.

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