Unusual Options Activity: What is it and why do we watch it?
Unusual options activity has become a buzzword over the last few years and has exploded in popularity. Websites, social media, and even CNBC have segments dedicated to tracking this unusual activity. With such a big spot light on unusual options activity, let’s take a look at what it is and why we pay attention to it.
What is Unusual Options Activity?
Unusual options activity is essentially watching the options market for clues as to what may happen in the future. Since options have a limited amount of time to be right and pay out, they can give us some insight into what the big money traders and hedge funds think about a particular stock. So what we’re doing, is simply watching the options market and looking for trades that stand out, anything “unusual.”
Unusual can mean a number of things. It could be a large trade. A large dollar amount or contract size could be a sign of something unusual. It could also be a smaller amount but on a ticker that isn’t normally traded. If something doesn’t normally trade a lot, but all of a sudden there is a spike in interest in that name, that would stand out to us. While we will always only have a piece of the data (we don’t know why these trades are being placed, until sometimes afterwards) we have to constantly evaluate what we see happening on the options market and decide if something is unusual enough for us to follow into that trade with our own money.
Why do we pay any attention to it?
Unusual options activity can give us a clue as to what may happen in the future. Hedge funds and big money traders don’t commit large amounts of capital to a position that has an expiration date without doing their research. Once their research is done and they are confident in their analysis, they will commit capital to a trade. What we are doing is relying on the big research departments of these firms and traders and following them into that same trade. If a large amount of capital is exposed to the options market or if we’re seeing activity on a name that doesn’t normally get any, we have to ask ourselves why. Now, we won’t be able to answer that question all the time. So, again, we are relying on the research and information the big money traders have and forming our own thesis as to whether or not we want to take the same trade.
Someone always knows something. Often times we will see some unusual activity in the options markets and make a note of what we saw. Maybe a few days or weeks later, a headline comes out that explains why the trade was made. We have frequently seen activity in a name that follows with a headline that sends the stock soaring higher or lower. While some people think it isn’t fair if these funds have information that we don’t have access to, well, that’s just the way it is. Fair or not, doesn’t matter. What matters is that we can see how they allocate their capital and follow them into the trades they place having had that information that we don’t. There is nothing illegal about unusual options activity, either. Whether a hedge fund has access to information that we don’t, all we are doing is placing money into an options position that someone else initiated.
How do we spot this unusual options activity?
At Bullflow, we have designed a scanner to search through all of the trades happening on the options market. We have created an algorithm to sort through this data and eliminate what we think to be just noise. What is left is a ton of data to sort through further, with our own eyes. There is a pattern we can spot that will make trades stand out from the remaining data. What we are doing throughout the day is watching the data come through the scanner, looking for the right pattern. Once we spot this pattern, we are comfortable following into those trades with our own money.
Not all options flow is created equal. There are lots of scanners on the market to do this same thing. However, the quality of the data is what is important. It is very important to know what data needs to be seen and what data needs to be ignored. A similar look in one trade that may be significant, may not be significant in another trade. So, education on what is unusual and how to use that info is vital to the success of an options flow trader.
At Bullflow, we have a complete educational system rolling out that will include classes and seminars, live analysis, and human led guidance through what the algo is seeing. We will help make you a knowledgeable flow trader that stands apart from the rest. Having the correct data is the first step. Understanding how to interpret that data is the next. Our mission is to make sure you understand what unusual options activity is and how to use it to profit.