This morning, 50,000 Microsoft calls traded in the first 3 minutes.
The wild part is Microsoft did nothing before the bell.
But once the market opened, a call-buying program hit, and within 15 minutes, the stock had already moved as far as the options market expected it to move ALL WEEK.
You’ll see moves like this again, probably this week. Before you touch one, run these 3 checks.
First, look at where the options traded. On your platform’s options time and sales, every trade shows whether it went off at the bid, the ask or somewhere in between.
This morning, 17,000 of those Microsoft calls traded at the ask or above. That means buyers weren’t negotiating. They were sweeping, buying everything the market makers offered, at any price.
When you see that, you’re looking at a program, and programs can stop as fast as they start.
Second, measure the move against the expected move, the range the options market prices in for a stock over a given period.
Then write it down yourself. Your platform calculates one automatically, and it’s usually good enough for government work.
For Microsoft, the upper edge of the week’s expected move was around $531, and it hit that level 15 minutes into Monday.
Third, check the all-time high. A stock that covers its whole week’s expected move in 15 minutes has usually gone too far, too fast, and that’s normally where I take the other side.
But Microsoft’s all-time high is only a few percent above that, in the $550s. When a stock gets that close to its all-time high, it makes a lot of sense for it to just keep going, and retail will buy calls like there’s no tomorrow trying to push it there. So I didn’t bet against it.
Buying it wasn’t the answer either. By the time the sweeps showed up, the move was already priced in, and squeezes like this can reverse in seconds.
Microsoft wasn’t my trade anyway. I’d already put on a bullish spread in Apple, set up for exactly this kind of squeeze.
Why The Biggest Stocks Keep Jumping At The Open
Implied volatility is the options market’s forecast of how much a stock will move. Microsoft’s longer-dated options are priced at only about 30%, which says the market expects calm.
But zero-day options, contracts that expire the same day they’re traded, are creating huge moves in short bursts, even in the biggest, most mellow stocks. In July, they made up a record 66.2% of all S&P 500 index options volume, according to Cboe.
I’ve talked to everybody in the industry, and there’s no easy way to handicap it.
But big stocks are going to keep making sudden moves at the open, and now you know how to size one up in a few seconds.
I cover order flow, expected moves, and trade high probability setups each morning in TheoLive. If you’re not in there, and would like to join me, click here to get started.
To your success,
Don Kaufman
