If you’re a big investment firm and you have decided to invest in a sector that you think is about to be profitable, you have to be careful of the way you execute your trades. This is because when a firm buys thousands of shares of a stock, it is likely to make the stock move up, by sustaining demand even when offer isn’t present.
This demand-side bias will exist even when the buy order is executed over a long time, such as months and the result is that the OBV will gradually gain momentum.
You can bet that at some point, the institution’s theory won’t be as valid as it was initially because the stock can become expensive.
What do you do ?
The easiest way is to buy into convertible funds, which are funds for which the shares can convert into the constituents of the fund or index.
But of course, thos funds have the same problem. Then there are options, which can allow you to buy at set prices, or offset your losses due to the rising price by the premium sold. Selling put options is often used by the likes of Warren Buffet to execute large orders. You either get exercised at the price you wanted, or you pocket a premium while you wait.
Now, if you come to the end of a 3 month spree and you find the stock is a little expensive, but you still have 10 million shares to buy, you might consider manipulating the market into giving you a better price. Simply use some of the money to sell heavily on the 3 or 4 major constituents of the ETF you wish to buy and voila ! the ETF will take a dive until you let go of the pedal. Once the stock is at the level you wish to buy again, you can resume buying. It’s better to do this on a Friday, before people leave for the week end, leaving your positions hedged without too much volatility. On monday morning you can come back in during the pre-market hours and start your buying again before anyone notices.
I think this is exactly what happened today with TAN.
I could confirm this with the charts for the top 25% of TAN’s constituents against the chart for the rest of the 75% of it, but I’m lazy today. You can see I sold the 37-38 spread and the ETF just went right under the short put strike. I will most likely unroll this trade on Monday morning if the pre-market continues to show panic. I might buy back the put and keep the long put, depending on the action in the price. This is because I sold the spread for the November expiration which is still 21 days away.