Tracking Unusual Options Activity
So you want to know how to find unusual options activity? Unusual options activity (or “UOA”) can be a “giveaway,” so to speak, that there could be a large move in the underlying stock in the near future. UOA is typically sparked by hedge funds and institutions, as they trade the options market regularly with very large trades to gain profits on the massive leverage that options can provide. It is very common for these institutions to position themselves in advance of a pending news announcements, such as a buyout or bankruptcy, that may not have gone public yet. These insiders are often referred to as “smart money.”
A strong strategy for retail traders is monitoring regular options order flow (not just UOA) to spot what “smart money” is doing and follow along in the most profitable way possible. Although UOA is tricky, using this strategy can see potential gains that are ridiculous.
If you are not familiar with listed options, they are labeled as either “calls” or “puts.” A call gives the buyer the option (or right) to buy the stock at the expiration date (usually 100 shares) at the purchased strike price, while puts give you the option to sell the stock. A call buyer takes on a bullish bias, while a put buyer takes on a bearish bias.
I strongly urge you to do some homework before ever considering selling either calls or puts. However, when you buy either, your downside is always limited to your capital invested. When you sell either, downside can be infinite (similar to short and long trades). This write-up will touch on calls, and how to find unusual options activity.
What Makes Unusual Options Activity “Unusual?”
At or Above Ask Price
Look to see if the trade took place at or above the ask price. Such a trade would indicate that the buyer was very aggressive, and willing to pay the premium price to execute the trade. Trades at or above the ask tend to be much more significant.
Size vs Daily Avg.
You can define UOA by the size of the trade, but just looking for the biggest trades won’t get you too far. The average sized trade for that particular name must be compared. As an example, 1,000 contracts traded in an MSFT option would not be considered unusual, since Microsoft trades much more than that on a daily basis. Those same 1,000 contracts traded on a less liquid name would certainly be a more significant. Roughly 4 times the normal volume would typically qualify as unusual.
Volume vs Open Interest
Compare volume to open interest. Open interest (or OI) represents exiting positions that are outstanding, that are still open as of the beginning of the day. If volume exceeds OI, you know that someone is opening a new position, which has far more informative value than that of a closing one.
Implied Volatility Change
Implied volatility (or IV) displays the overall expectation of future volatility. Therefore, an increase in implied volatility is a more valid trade signal than a larger order that has a lesser impact on IV.
How to Find Unusual Options Activity With CheddarFlow
The process of breaking down valid unusual options activity can be daunting. It seems like a lot of analysis to perform on one trade, but options order flow scanners can handle all of this for you in a very streamlined way, taking out a lot of the guess work. Several viable platforms are available, but my favorite by far is Cheddar Flow.
Lets look at an example…
Pulling up Cheddar Flow, filters can be selected that eliminate trades that are not relevant – in this case we’re looking for unusual orders.
Looking a little closer, the ROKU back to back sweeps stands out. These trades took place late in the session on 4-13-2020. They were out of the money, and a thinly traded contract with only 37 in open interest at the time. The smallest of the two trades was therefore six times what was sitting in open interest. At first glance, it would appear that some built a $176K position anticipating that ROKU would see a move above $99.50 within two weeks of the purchase date.
Pulling up the 1 hour chart and seeing when this took place, it was an inverse head and shoulders breakout.
What occurred immediately after the close was a positive report in regards to guidance that saw a strong breakout and follow through move on several gap ups in coming sessions, taking price far above the $99.50 strike. While this certainly won’t occur in every scenario, it goes to show the power that unusual options activity can provide and how valuable tools like Cheddar Flow can be.
How to Find Unusual Options Activity with Trade Ideas
Another option for how to find unusual options activity is with a scanner like Trade Ideas. Trade Ideas is evolving their options related tools on a daily basis, so watch for changes moving forward. The options channel on the channel bar features many options windows, including “Somebody Knows Something” shown below. While this window won’t give specific strikes and expiration dates, it gives notice to some of the unusual options activity names for the day as they come in. This is another valid method you can use for how to find unusual options activity.
Related reading: TraderMentality’s in-depth review of Trade Ideas
While these setups are not a 100% guarantee, they can lead you to find hidden gems in the market. I hope you now understand how to find unusual options activity, and develop a strategy for executing upon it. Note that timing on some of these can be crucial. If smart money is playing weeklys, you may miss much of the move if you come in late.
Never take a trade simply as a result of smart money activity. Pull up the chart for yourself. Analyze what you see. Figure out “what would cause them to take such a large position here?” Trade it for yourself, with smart money as your reassurance. While I’m not a fan of UOA for my main trading plan, extremely profitable situations can arise from such scenarios. However, trading UOA can be tricky. Literally hundreds of thousands of options orders clear every day. That leaves a lot of “noise out there.”
In most cases involving weekly contracts, the trade (for smart money) could last anywhere from minutes to days. Contracts that are further out give you more time to adapt, wait for key entries, adjust charts, or add/trim. They carry less overall risk, but won’t see gains near as quickly as weekly OTM contracts. Read more about time related options trading in The Value of Time.