One of the most interesting “smart money” trades we came across yesterday was with Arena Pharmaceuticals, Inc. (NASDAQ: ARNA).
If you’re new here, a “smart money” trade is a relatively large volume option trade most likely made by a pro trader. The idea is to analyze unusual options activity, identify an interesting “smart money” trade, and then make our best guess as to:
- Which direction the trader thinks the stock is headed
- How much they think it will rise (or fall), and
- In what time frame this will all happen.
If we like what we see after putting all these pieces together, we can mimic the “smart money” trade (on a smaller scale), and potentially ride alongside our pro trader to profits. With all this in mind…
A Pro Trader Just Bet $3,287,440 that ARNA Will Continue to Climb in the Next 3 Weeks
On Friday, December 31, 2021, a pro trader seems to have bought 754 of the January 21, 2022, $50 call options on ARNA for $43.60 per contract. His outlay was $3,287,440.
The trade’s breakeven point is at $93.60, meaning that ARNA needs to rise to $93.60 for the call option trade to break even. This is near the stock’s previous close of $92.94. And then for every $1 the stock rises above $93.60, our “smart money” trader will make $75,400!
On analyzing the daily chart of ARNA, the stock seems to have broken out of a symmetrical triangle pattern (marked as blue color lines). This breakout level would now act as a strong support area. The stock is also trading within a consolidation area, which is marked as a purple color rectangle. All this makes it likely that our pro trader is bullish on ARNA.
This lends credence to our conclusion that the pro bought these call options, as opposed to selling them.
If you agree and would like to mimic this trade, here’s how:
Buy to open the January 21, 2022, $50 call options on ARNA for $43.60 or better.
As always, depending on your risk appetite, do remember to set a stop-loss for the options trade to avoid significant losses.
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