The Danger of Reading into 'Large' Trades

The motives behind big trades are seldom clear, especially on mega-caps like Exxon Mobil Corporation (XOM)

Nov 25, 2015 at 10:21 AM
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It's almost Thanksgiving. Time to open up the viewer mail!

"On ______'s blog today, I had an 'invigorating' discussion with another 'member' about what large trades mean. He has a habit of writing, 'XYZW Co traded 10,000 calll option at $x.yz.' (sic)

"As an example, today he mentioned that XOM traded a lot of call options. Please see enclosed graphic. He referred to the nearly 10K call options listed at the top.

"In my view, these are meaningless in terms of 'tells' or information. They are far out of the money. Nobody knows with certainty where a large company like XOM will trade in any time soon. For all I know, someone is hedging a position. With roughly 0.2 delta, perhaps the guy was short 200K shares?

"What say you?"

My friend is referring to a big block of December 85 calls. They're not that far from the money, but like he says, they do carry a small delta.

I would totally agree with his take on it. Don't go crazy reading much into trades like this. Exxon Mobil Corporation (NYSE:XOM) is a stock with a huge float. These calls trade in the $0.75-to-$0.80 range. We're talking about something like a $750,000 investment, which sounds like a lot to you and me, but is likely a drop in the bucket to a fund with an XOM position. Or perhaps it's a fund establishing an XOM position. Maybe, as my friend says, he's short the stock and is hedging. He might even be short an energy exchange-traded fund (ETF) and likes XOM's upside on a relative basis.

The big points are 1) Who knows what he's doing in the bigger picture? and 2) Even if we did know, if it's a large player, it might be the equivalent of a tiny position from his/her perspective. And even with knowing he's straight speculating, who's to say whether it's smart money or a contra tell?

Now, if it's a small name, that whole analysis is different. If we're talking a biotech, say "XOM Pharmaceutical," then I'd take this trade WAY more seriously. I'm thinking someone's bunny got wind of a deal or a Phase 27 approval of a new medication to treat overexposure to DFS ads, or something else that could really move this pup.

For actual XOM though? I'd need to see a lot more volume, and see it over and over again. And by that point, it's probably too late anyway, so I'm not bothering to read into it to begin with.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.




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