Unusual JBLU Options Activity Sets Scene to Take Speculation to the Next Level

by Josh Enomoto

If there’s one thing to be learned from the movie “21”, it’s that knowledge is power.

In the film, a group of students (and one morally compromised professor, played by one subsequently morally compromised actor… ) at the Massachusetts Institute of Technology (MIT) use their mathematical skills to gain an advantage in blackjack and win large sums of money.

I’m no gambler but the gist of the scheme involves card counting. When the ratio of high cards (like 10s, Jacks, Queens, etc.) runs higher than usual, the deck is said to be “hot.” Spotters covertly signal to players what this reading is, allowing the latter to place larger bets when the odds favor them. Conversely, when the deck gets cold, the player reduces the size of the wagers.

Of course, no gambling scheme is perfect. However, when a mathematically sound system is deployed over the long term through the framework of effective money management, the odds are high that the smart player will win. A similar principle can be applied with options trading, specifically by exploiting the unusual options activity screener.

Take What the Market is Giving You

Let’s just jump right into a real-world example. On Friday, one of the call options underlying JetBlue Airways (NASDAQ:JBLU) represented the most aberrant option trade, according to Barchart. Specifically, the $8 call expiring Oct. 25 printed volume of 55,829 contracts. That’s well above any other strike (call or put) in that options chain.

Drilling deeper, Barchart’s options flow screener — which filters exclusively for big block transactions likely placed by institutional investors — revealed that 8,000 contracts stemmed from this class of professional market participants. By logical deduction, the other 47,829 contracts hailed from other sources, perhaps the aggregate of the so-called public money.

Basically, the market seems to anticipate modest appreciate in the JBLU stock price prior to this coming Friday. Shares closed last week at $8.05. In the past month, they swung up over 40%. So, there’s still immediate potential but JetBlue could be running out of legs soon.

Put another way, the market sees enough expansion potential in JBLU stock to beat the premium (an ask of 39 cents) but not by much. It also means that you would get a disproportionately large premium for selling the $8 call — the call that everyone (metaphorically speaking) wants.

Go Contrarian in JBLU Stock But the Smart Way

With this knowledge, you should be tempted to go contrarian on JBLU stock, but not in a stupid way. You know what I’m talking about. There are folks that emphatically argue that you should always do the opposite of what the masses say.

But sometimes, the masses are right.

This could very well be one of those “sometimes”; in this case, the public money could be correct: JBLU stock may have some legs remaining. It’s just that I’m not 100% sure if it has the legs that the optimists believe. Recognizing this dynamic, it may be more prudent to consider selling the $8 call as part of a bull call spread.

Basically, we’ll take the credit (income) earned off the sale of the $8 call and use it to offset the debit of the $7.50 call, which also expires this Friday. That way, the maximum we can lose is 36 cents (or $36 when applying the option multiplier). This figure is derived from gross debit paid of 70 cents minus the 34 cents of income received (the bid price of the $8 call).

To be fair, the maximum profit of this bull call spread would be limited to only 14 cents (or $14). However, to receive the maximum profit, JBLU stock would only need to be at or above $8. Further, the breakeven threshold drops to $7.86.

In contrast, buying the $8 call outright like everyone else is doing requires JBLU stock to reach $8.39 ($8 strike plus 39 cent ask), just to break even. To receive the same profit as the aforementioned bull call spread, JBLU would need to jump to $8.53.

That’s 5.34% higher from Friday’s close, an ambitious target.

The Takeaway: Be Smart with Call Spreads

Bull call spreads sometimes get a bad reputation because of the limited upside. However, it’s also important to note the positives. These trades lower the threshold to profitability, improving your chances of success. Also, they offer a great opportunity to sell high-demand options while capping off downside liability.

Disclaimer: The author did not hold a position in any of the securities mentioned above. The information provided in this article is for educational and informational purposes only and should not be construed as investment advice. Always conduct your own research or consult with a licensed financial professional before making any investment decisions. Past performance is not indicative of future results.