Monday, September 21, 2009

Perot Systems (PER) – Options order flow leads the way again

It may seem suprising, but when you get hired as a clerk by an options firm, you have a lot of very interesting duties. Clerks spend lots of time running errands, picking up lunch, getting coffee, etc. One of the most interesting “duties” is spending a lot of time playing poker.

Why poker? Because it teaches game theory. Studying betting patterns is a key component of poker. People who bet very heavily are likely to have a good hand, unless they are bluffing. That logic also spills directly over to the options market. A good hand in trading could be superior information. The main difference is in options there is no bluffing. Each trade is real cash being slapped down.

Perot systems is a perfect example. Option volume has been creeping up the last few days, higher than the last two years. Also, IV30 has higher than the last two earnings events.

Looking at the increased option volume, lets look specifically at what happened on Friday. In the Company tab, we can see 900 of the October 20 calls traded on the ask (green color) for .55 two minutes before the close. This is about $50K on this trade alone, betting the stock is going to make a new 2 year high before October expiration.

Monday morning, news hits the wire …

Dell agrees to buy Perot Systems for about $3.9B ($30 cash per share)

To see the terms of the deal, simply click on the “C” (for Corporate Action) icon next the company name in the summary area. A popup appears with the terms of the deal.

Once again, option order flow leads the way and predicts the stock move. Order flow is one of the most important indicators professional traders and market makers use to understand stock movement. That $50K is now worth about $850K.

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