Is Options Flow Broken?

I get this question periodically, when I'm not posting a lot of options flow. The short answer, is no, options flow is never broken. In fact, whether I'm posting a ton of flow or nothing at all, both cases are telling us very important information.

The reason options flow can never be broken is because of what it is. Options flow is, literally, just the trades being placed in the options market. It is nothing more, nothing less. As long as people are placing options trades, we'll see what is happening in that market. When people aren't placing as many trades, the flow will be lower quantity and lower quality, but it isn't broken. The scanner is still showing us exactly what is happening in the options market.

Now, when people ask that question, I know what they mean. They're wondering why there aren't as many high quality flow trades posted. There could be a number of reasons for this. The main and repetitive reason would be earnings season. When we have a bunch of top names reporting earnings shortly, big options positions aren't being opened as frequently. The reason for that is that no one wants to expose a large amount of capital right before a binary event. It's too risky. Another reason, as in recent weeks, could be an election year, or any other big event like that, that could bring with it increased volatility. Large amounts of capital just aren't being exposed to these increased volatility markets.

When we're in a period of lower quantity/quality options flow, that still tells us important information about the markets. It tells us that the big money traders and hedge funds feel like the markets aren't in a position to provide optimal risk:reward trades. If the big money isn't willing to expose their capital, that should be a warning to us, as well, to use extra caution in opening positions.

Now, being smaller traders, we are more nimble. We can get in and out of positions quicker than someone trying to put on a multi million dollar position. So when the options flow seems to have stopped showing high quality trades, it doesn't mean we can't trade options. It also doesn't mean there aren't good options flow trades to follow, even if we're not seeing the top tier options flow.

As with ANY trade, we need to evaluate the risk associated with any flow trade we are placing. It is ok (and still can be nicely profitable) to follow some options flow that we like even in periods where the high quality/high quantity flow dried up. Hedge funds have rules they have to follow to open new positions. So, while a hedge fund might not be able to open a lot of new trades, it doesn't mean there aren't profitable options flow trades for us to take. The risk might be slightly higher, but being more nimble means we can still find profitable trades in the flow.