- 1. Unusual Options Activity
- 2. How to Identify Unusual Options Activity
- 3. What Happens Next?
Unusual Options Activity
When it comes to options order flow, identifying unusual options activity is one of the most important facets of order flow analytics. Unusual options flow can reveal what smart money is buying and selling, earnings beats and misses, future market sentiment, and even insider trading. However, if unusual options activity is so revealing, why is it so often overlooked by retail traders? The answer is simple; many do not know how to identify it.
What is Unusual Options Activity?
Unusual options activity is defined as “option contracts that are trading at a higher volume relative to the contract’s open interest.” At TradePro Academy, when providing order flow analysis, we will preferably try to find order flow where the volume exceeds open interest, as that implies that the move has yet to be made in the underlying. When unusual options volume is identified in a ticker, it can imply that big money ‘knows something’, and it’s often beneficial to look deeper into that order flow.
Another aspect of unusual options activity is when an unusual ticker is receiving unusual volume. Names like TSLA, SPY, and AAPL almost always have heavy volume, and therefore, when one of those names is receiving higher than normal volume, it isn’t as indicative of a big move in the near future. However, if we were to see a name that is thinly traded on the options market with unusually high volume, preferably on a contract exceeding open interest, then that tends to be indicative of a big move.
Unusual Options Order Flow Example:
Unusual Order Flow Screenshot from Trade Alert
For example, the above screenshot is all of the unusual options flow identified on Trade Alert. Trade Alert has identified this options flow as unusual because of the volume. In the “Mult” column, we can see how high the daily volume is for a ticker compared to the average daily volume. MRNA (Moderna) for example, has 3.3 times normal volume. RY (Royal Bank of Canada) is another ticker that has been identified for having unusual options activity, except RY has 53 times normal daily volume, which is considered extremely high.
Why is Unusual Options Activity Significant?
As an order flow analysts, we are inclined to make the assumption that “smart money” is almost always right. By identifying unusual options activity, we can discern whether or not the unusual options flow is smart money trades. By doing so, we can feel confident in knowing that we’ve done our due diligence, and have a low risk/high probability ratio in being in a profitable trade. As stated above, a lot of time smart money has access to information that we as retail traders do not, and therefore, we want to be able to identify unusual options activity executed by smart money or institutions.
Order Details – What to Look For
When identifying smart money, unusual order flow, there are a few guidelines to help increase your chances in finding a smart money trade:
- The quantity of contracts/market direction – More often than not, we want to look for an odd number of contracts in order. An odd number increases the chances of the order not being connected to a spread or shares. Ideally, we want to find strong directional trades, unhedged.
- Premium spent – When smart money is confident about trade, they’ll have no worries about spending a large amount of premium on a position. Large premium trades are almost always executed by an institution, and these are the type of unusual options trades we want to look for.
- Implied Volatility and Vega – By finding order flow that has an increasing implied volatility percentage (meaning a big move is being priced in), or a high Vega value (meaning smart money is buying a specific contract because they believe that the implied volatility will increase, and they want to find contracts that have the highest Vega value possible to capitalize on the implied volatility increase) we can safely assume that there is an upcoming catalyst for the ticker, making this order flow unusual.
- Increasing Session Volume and/or Open Interest – If we continue to see smart money trades in a specific ticker and/or contract, it could also imply that there is an upcoming catalyst. Monitoring changes in open interest and volume is a good way to see where the smart money is rotating. We also ideally want to find trades that have a higher volume than open interest, implying that the move has yet to be made.
How to Identify Unusual Options Activity
Trade Alert and Quant Data are TradePro Academy’s choices for identifying unusual options flow. Both programs are unique in the sense that they offer their own filter tools, and highlight unusual options flow as a filter. Also, the tape is consolidated in-house for both platforms.
On July 23, 2021, unusual options flow was detected in Facebook (FB). Facebook had 3.8 times normal volume on the day, with calls leading puts 75% to 25%, and open interest increasing to 57% (open interest on trade alert is updated in real-time, meaning growing daily volume). Compared to all previous days where Facebook had “unusual flow” this day had by far the most in terms of multiple, bullish bias, and growing open interest.
Unusual Order Flow Screenshot for Facebook (FB) from Trade Alert
After hours on July 22, 2021, both Twitter and Snapchat reported earnings after the bell, and both largely beat expectations. As it’s not uncommon for tickers in the same sector to experience “sympathy moves”, smart money started buying Facebook aggressively at open on July 23, 2021, creating unusual options flow with a bullish bias. Around 10:00 AM on Friday, July 23, 2021, Facebook started rallying aggressively, hitting a high of 375.33 from its opening price of 360.91 per share. This was a huge rally, especially for FB, and now we know why the unusual options flow was coming through the tape.
Screenshot of Facebook’d (FB) chart on the 5 minute timeframe. Volume in the underlying started coming in around 10:20 AM, about 50 minutes after the unusual options flow started hitting the tape.
What Happens Next?
Unusual Options Activity Training at TradePro Academy
At TradePro Academy, we emphasize the importance to our community of how to identify unusual options activity. As it’s likely indicative of smart money “knowing something”, we incorporated unusual options analysis into our weekly swing list offered to our community, as well as into our daily watch list for our options live trading room.
Additionally, we also offer training in how to identify unusual options activity using Trade Alert and Quant Data. If you’re not already a part of our community, join us today at community.tradeproacademy.com, and learn how to take advantage of unusual options activity with a group of like-minded traders!
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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO AcademyTM is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.