Undeniably, Barchart’s screener for unusual stock options volume is an important tool for deciphering market sentiment, especially among the voices that matter. Indeed, the smart money is akin to battleground states. Sure, California and New York represent the nation’s economic engine. But it’s states like Pennsylvania and Georgia that ultimately determine the presidency.
Still, it’s not a perfect analogy because unusual options screeners can be deceiving. For example, put/call ratios provide a potential clue as to the smart money’s motivations. At the same time, derivatives can be bought or sold, thus changing whether the position is debit based or credit based. Moreover, an elevated volume of calls doesn’t necessarily imply bullishness nor does heightened put activity necessarily imply bearishness.
Further, not every security generating unusual options activity is going to be statistically intriguing. Frankly, many if not most names that look attractive are simply generating noise. A select few are genuinely tempting — and it’s my belief that we can deploy Markovian frameworks and probabilistic analyses to separate the wheat from the chaff. We’ll dive into this concept soon enough.
For now, investors may want to zero in on Boston Scientific (BSX). A specialist in medical devices, BSX stock has been a solid performer. Since the start of this year, the equity gained nearly 17%. For context, the benchmark S&P 500 index is up only less than 7% during the same frame.
Even better, those who missed the boat may have an opportunity for a do-over.
On Thursday, total options volume for BSX stock reached 15,589 contracts, representing a 33.39% lift over the trailing one-month average. Call volume hit 11,368 contracts while put volume sat at only 4,221 contracts. This pairing yielded a put/call ratio of 0.37, which in theory favors optimistic traders.
Still, as I mentioned earlier, investors need to be careful of reading too deeply into the ratio. It’s here that options flow — a screener that focuses exclusively on big block transactions likely placed by institutional investors — can be instructive. Heading into the holiday weekend, net trade sentiment clocked in at $378,800 above parity, distinctly favoring the bulls.
Leveraging Statistics to Chart a Way Forward for BSX Stock
As compelling as the unusual options data is, the screener alone doesn’t always provide a clear framework for when an anticipated move may materialize. Usually, transactions in the derivatives market feature multiple expiration dates, making inferences difficult. To remedy this challenge, we can apply statistical analysis.
Unfortunately, statistics is a deceptively difficult practice in the investment markets. Taking the frequency of the desired outcome divided by the total number of events merely calculates the derivative probability or the outcome odds across the underlying dataset’s entire distribution. What we’re looking for is the conditional probability — the outcome odds across a specific subset of the data.
However, conditional probabilities really can’t be calculated using share price or its many derivatives because of the continuous signal problem. Another remedy must occur and that is the process of discretization — converting scalar signals into discrete states. This is where market breadth or sequences of accumulative and distributive sessions comes into play.
In the past two months, the price action of BSX stock can be converted as a 4-6-U sequence: four up weeks, six down weeks, with a positive trajectory across the 10-week period. Admittedly, this conversion process compresses BSX’s magnitude dynamism into a simple binary code. But the benefit is that this code segregates price action into distinct, discrete behavioral states — forming the basis for Markovian analysis.
Essentially, we’re looking for the likelihood of sentiment transition based off the 4-6-U sequence. From past analogs, we know that this sequence materialized 17 times since January 2019. Notably, in 64.71% of cases, the following week’s price action results in upside, with a median return of 1.79%. Should the bulls maintain control of the market for a second week, investors may anticipate an additional performance boost of around 1.1%.
Based on last Thursday’s close of $104.32, BSX stock could potentially crack above the $107 level within the next two weeks.
A Quick Strike for the Bold
For those who want to roll the dice on the statistical narrative above, the 105/107 bull call spread expiring July 18 could be enticing. This transaction involves buying the $105 call and simultaneously selling the $107 call, for a net debit paid of $100, the most that can be lost in the trade. Should BSX stock rise through the short strike price ($107) at expiration, the maximum reward is also $100, a payout of 100%.
Primarily, what makes this trade attractive is the implied shift in sentiment regime of the 4-6-U sequence. Ordinarily, BSX stock enjoys a fairly robust upside bias. As a baseline, the chance that a long position on any given week will be profitable is 56.47%. However, the 4-6-U adds 8.24 percentage points of favorable odds for the bullish speculator.
To be clear, no forecasting model is perfect, particularly because the stock market is an open system, which means that outside catalysts can enter the paradigm and disrupt it. Still, the discretization process mentioned earlier for the purpose of applying Markovian principles helps us to empirically quantify our decision-making process.
