Although investors have thousands of securities to trade on any given day, it can be difficult to separate the wheat from the chaff. That’s where Barchart’s unusual options volume indicator can provide an important clue. The options or derivatives market represents the arena of the smart money. Therefore, if the professional folks are targeting specific entities over others, it’s usually worth your while to take a closer look.
On Monday, one of the companies generating significant interest was Fiverr (FVRR). Officially billed as an online marketplace for selling goods and services, Fiverr is essentially an ecosystem for independent contractors and the businesses that want to hire them. Yesterday, total options volume for FVRR stock hit 15,806 contracts against an open interest reading of 37,787 contracts. Volume at the time represented a 470.61% lift from the trailing one-month average metric.
What attracted many investors is the breakdown between calls and puts. For the former category, volume stood at 15,534 contracts, leaving the latter category at only 272. Subsequently, the put/call volume ratio sat at 0.02, which at face value suggests extreme bullishness. A peek into options flow data — which focuses exclusively on big block transactions likely placed by institutional investors — reveals net trade sentiment clocking in at $133,900, favoring the bulls.
In total, transactions of a bearish nature sat at $-106,100, with their counterpoint landing at $240,000. Therefore, the sentiment among the professional money is decisively bullish. With that in mind, the overall sentiment appears to track with what we’re seeing in the unusual options indicator. Still, jumping onto the bullish bandwagon might not be the best approach. Instead, a more directionally neutral stance might be better.
Leveraging the Iron Condor for FVRR Stock
On the surface, circumstances suggest that adventurous investors should take a directional wager with FVRR stock. Primarily, FVRR stock popped higher following its strong third-quarter earnings report. In the disclosure, the company posted sales growth of 8% year-over-year to $99.6 million. On the political front, it’s possible that President-elect Donald Trump’s pro-business stance can help boost the freelance ecosystem, thereby indirectly supporting Fiverr.
However, one needs to also consider the market’s expectation of movement. Using Barchart’s historical implied volatility (IV) data — a feature that can be accessed with a Barchart Premier membership — you can see that IV rank was rising ahead of the Q3 disclosure. Since then, this metric slipped conspicuously, which suggests that the market doesn’t anticipate as much kinesis in FVRR stock.
That makes perfect sense — the big catalyst of the Q3 report (and the presidential election) is in the rearview mirror. Moving forward, the narrative is interesting but arguably not directionally compelling. This is where a short iron condor might make sense.
Structurally, a condor represents a four-leg (strike price) transaction. The short iron condor is a credit-based approach (hence the word “short”), meaning that the trader starts from a cash inflow position. Effectively, this particular condor is a combination of a bull put spread and a bear call spread. That means the maximum profitability zone will land somewhere between the inner strike prices as opposed to a directionally positive or negative area.
Depending on the circumstances, there could be several iron condors to choose from. However, a good tool to use is Barchart’s Expected Move calculator. For example, the platform notes that the options chain expiring Dec. 20 of this year features a high-low range of $33.22 and $26.76. That provides a rough estimate of the range that our condor should cover.
Based on the above information, our baseline condor would be the 24.00P | 26.00P || 34.00C | 36.00C. Here, the upper and lower breakeven prices come in at $34.30 and $25.70, respectively. For putting $170 at risk, we can potentially keep the full reward of $30, giving us a yield of 17.65%. Still, there is a more compelling idea for those willing to take a bigger risk.
Dialing Up the Pressure
The aforementioned condor featured an absolute profitability range of $29.26%; that is, there is room for FVRR stock to move up 12.57% and move down 16.69% before becoming unprofitable. However, if you’re willing to shave some of the “downside protection,” you can potentially grab a much more tempting reward.
Take a look at the 25.00P | 28.00P || 34.00C | 37.00C condor. Here, the upper breakeven price rises a bit more to $34.75. However, the lower breakeven moves higher at $27.25. Granted, that’s riskier. Further, the trader is in danger of losing a maximum of $225. However, the reward stands at $75, meaning that the yield jumps to 33.33%.
As a speculator, I would be more inclined to consider this idea, in part because of the options flow data. If you filter for bearish transactions only, the smart money traders on Monday were only interested in selling calls, presumably either covered calls or as part of a multi-leg strategy. Either way, as a general statement, sold calls are less aggressively bearish than buying puts.
It’s possible that without overt downward pressure, FVRR stock may consolidate but with an upward bias. That would make the more aggressive short iron condor an enticing (albeit risky) idea.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
