Flow Review November 2024: Unusual Options Activity around Microsoft $MSFT and $AI news

In this Review, we’re going to break down some unusual options activity for C3. ai Inc, $AI. The position we’ll cover involves three separate legs, all of which seem to sing the same bullish melody. The timing of the trade is also… unusual.

The tale of the tape began on November 18th when we noticed unusual activity on the $AI $29C expiring on November 22nd, 2024. 

1,380 contracts transacted in a single order at the ask price of $0.09 per contract for a total net premium of $12,420. At the time of fill, the $AI spot price sat at $26.26 per share, placing this contract 10% out of the money. 

This order alone is interesting, but not crazy; such a cheap position (relatively speaking) could well be a “Eh, let’s see what happens with $AI this week” sort of play from a deep-pocketed investor or trader. However, this order merely coats the surface of the total position we’ll be looking at, today.

To inspect this transaction more closely, we click that big green volume bar and are transported via the magical essence of Unusual Whale’s FlowPower to the options flow feed, and we can see that this contract didn’t embark on its transaction alone; this little uppy-downy-arrow dealio on the left indicates this was a multi-leg transaction. Once we click on that, we get a pop-out window showing all potentially related contracts involved in that multi-leg transaction.

Now this is interesting. Assuming all these legs were actually transacted as indicated, this trader appears to have SHORTED the $27 call contract expiring on 11/22. We assume this because the fill of the transaction occurred directly on the bid price of $0.27. They likely LONGED the $29 call contract of the same expiration. On the surface, this would appear to be a Call Credit Spread wherein a trader longs the contract with the lower premium and higher strike price, and shorts the contract with the higher premium and lower strike price–generally a bet to the downside.

However, with the $25 call contract expiring in January, 2025 added in, having also filled near the ask price like the $29 call did, for a fill price of $3.48 per contract, things change a bit. Since they’re longing a slightly in the money contract, far dated, no less, what originally appears to be a bearish sentiment quickly shifts toward bullish sentiment. This is because aside from the credit spread between the $27 and $29 call contracts expiring on the 22nd, this trader has also punted $480k debit to buy-to-open the $25C for January. That significantly changes the structure and likely intentions of this trade.

Now that we know this was a multi-leg trade, that means the premium paid on the $29 call we discussed isn’t the full story; so let’s break this down.

LONG $29C 11/22/2024 → Debit of $12,420

LONG $25C 01/17/2025 → Debit of $480,240

SHORT $27C 11/22/2024 → Credit of $51,060

Total Premium Longs = $492,660

Total Premium Shorts =  $51,060

Total Cost of the Position = $441,600 (total premium on longs less the credit received from shorts)

Now, the position alone is interesting, because had the $27C and $29C transacted together alone, that short expiration date would make some sense. If both contracts expired out of the money, the trader would keep the full credit received for selling the $27C, and lose the premium spent on the $29C for a profit of $38,640. However, with that longer-dated $25C in the mix, that close dated expiration is a bit… unusual.

And was made all the more unusual, given a little catalyst about $AI that hit the news just a few days after this position opened.

On November 19th, just one day after this position hit the tape, the $AI stock price rocketed after market open following an announcement that Microsoft $MSFT is to enter a strategic alliance with C3.ai. Following the news that $MSFT and $AI will collaborate “to enhance existing capabilities and introduce new innovations….maximizing delivery of high-value enterprise AI options with Azure”, the $AI stock price shot its way to a 13% gain. This trader’s position ripped right along with it.

As mentioned, the structure of the short $27C and long $29C was set to eat losses if the stock rose sharply. And that’s exactly what happened. The trader closed this part of the position on November 19th following the news for a hefty loss. 

The $27C was closed for a price of $4.23 per contract; a loss of $532,680. The $29C closed for a price of $2.33 per contract; a gain of $309,120. This brings the total loss on the 27/29 credit spread to -$223,560. But the trader likely isn’t worried. Remember the $25 call contract expiring in January? Yeah; that bad boy is up bigly.

The $25C 1/17/2025 reached a high of $12.92 per contract on 11/21; a 271% gain from their entry of $3.48. At highs, this marked a profit of $1,782,960 on5 this leg. If we take away the trader’s loss on the 27/29 Credit Spread, this trader still sits at a net profit of  $1,559,400!!

The timing of this trade alone was unusual; $440,000+ in premium, with 2/3rds of the spread expiring in days. While the credit spread was closed for a loss, this trader is still firmly in profit on the remaining $25 call contract, and there are no signs at all downsizing in this position—the full 1,380 contracts in that $25 call are still open. Was this trader lucky, hitting on a large position the day before big news? Or was this just too convenient, and fall closer to the “unusual” sus-pool of options flow?

We’ll let you make that distinction ;)

NOTE: This post is not financial advice. The stock market is risky, and any trade or investment is expected to have some, or total, loss. Please do research before any trade. Do not use this information for investment decisions. Check terms on site for full terms. Agree to terms before considering this information.