How To Spot and Understand Contingent Trades
This article covers a concept that’s not often discussed in regards to options transactions that are tied to shares. We’ll cover this concept of “Contingent Trades” using the Unusual Whales platform, and the dark pool data feed therein!
What is Contingent Trade?
To start us off here, what exactly is a contingent trade? The formal definition from the Unusual Whales website marks a Contingent Trade as a transaction where the execution of the transaction is contingent(or as Dan from our team says, “dependent”) upon some other event.
A Qualified Contingent Trade is a transaction consisting of two or more component orders executed as agent or principal where the execution of one component is contingent(“dependent”) upon the execution of all other components at or near the same time and the price is determined by the relationship between the component orders and not the current market price for the security.
In layman terms, a contingent trade is a trade that depends on multiple instruments executing at a certain price, within a certain amount of time, tied together as all one unit. There’s potential for these to occur over a minute or several minutes, and don’t necessarily have to happen at the exact same time.
However, all criteria for the trade must be met before the trade will fill (see: “contingent”). This can be Options paired with Futures or Stocks, or even Futures paired with Stocks.
On Unusual Whales
On Unusual Whales, you can see fairly clearly the relationship between Options and Stock contingent trades. Let’s take a look at a contingent trade spotted on Tesla, $TSLA.
In the above image, is a contingent trade from the Dark Pool feed that fired on August 19, 2024. Note the tags that Unusual Whales assigns to such trades; in this case, the Contingent Trade and Qualified Contingent Trade tags applied. So we know that the dark pool transaction for 10,650 shares of $TSLA at $220.95 at 1:13pm Central is tied to options contracts, as well.
From the dark pool feed, we’ll next navigate to the $TSLA Overview page (above) set to Options Volume, and click the options volume bar near the same time stamp. Doing so transports us to the Flow Feed within that time window, and adjusting our filter to a minimum size of 100, we can see two transactions on the $240 call contract for the 8/30 expiration and the 11/15/2024 expiration.
Once we click the arrows icon that indicate a multi-leg trade, we’re met with what is most likely a Ratio Calendar Spread, with the $240C 8/30/2024 serving as the short leg, and the $240C 11/15/2024 as the long leg, with a 2:1 ratio, long:short (meaning 2 times the size on the long leg vs. the short leg).
If you look at the Share Equivalent column (size multiplied by delta), we see that the short leg equivalent is 2,906 shares, and the long leg equivalent is 13,270 shares. Since the short leg is representative of “negative” shares (as the contracts were sold to open), we subtract that share equivalent from that of the long leg, which gives us a net total share equivalent for the entire spread of 10,364. You’ll recall that the contingent dark pool trade was for 10,650 shares. That’s pretty dang close.
Now, we can’t be 1,000% certain unless you yourself know the desk or person who executed the trade, but it’s very reasonable to assume they’re related due to how similar these line up.
Given that with Dark Pool prints, we can’t know for sure whether the shares were bought or sold; but we can make some educated assumptions; and one likely assumption for this contingent trade is a “Delta neutral” position.
Since the trader receives positive delta from the Call Calendar Ratio Spread (which represents a positive delta of approximately 10,500 shares of $TSLA), and the trader sold approximately 10,500 negative delta via the (possibly) shorted shares from the Dark Pool print, they achieve a neutral Delta position.
As such, this trade structure isn’t focused on dramatic price movement; this structure is designed to profit off of an increase in call-side implied volatility multiplied by vega. We'll do a deep dive on the relationships between the Greeks for similar positioning in a later issue, but essentially this position profits when implied volatility and Vega go up, regardless of what direction the underlying share price moves.
You can see the full breakdown and explanation of this position in video, on the Unusual Whales YouTube.