First and foremost, look for an increase in call activity and an increase in open interest. In the First Data case, you saw the buying in April options spill over into May and open interest in the calls increase even as the stock price moved fractionally lower. This made unusual volume a more valuable and reliable tool for identifying takeover candidates or stocks in play, but the information was confined to a small group of people. So, given the huge possible returns, it only takes one good winner to pay for the multitude of losers that never pan out. He appreciates your feedback; click here to send him an email. It will also give you some sense of just how large a move one expects or is needed to turn a profit. In this way, you would see a spillover into the purchase of other calls on option strikes. But always remember the old caveat: buyer beware. To view a quick video breakdown of how to hunt out unusual activity, click here. The option activity takes place in absence of any known or substantiated news event, such as an upcoming earnings report.
Buying options three weeks prior to an earnings release would be a very premature way to play on earnings. So while I like reveling in the light of being right, there is a question we should address: How does one identify what is simply unusual activity from something that is a tip that smart money is at work? The time decay over the next three weeks would be a heavy headwind that would require the company to deliver a blowout number for those calls to turn a profit. In the past, when orders needed to be worked in person on the trading floor, not only did it take longer to execute the transaction, but it also was transparent as to who was doing what. Checking times and sales will reveal if these trades are outright purchases or part of a spread. First Data is slated to report earnings on April 19, just one day before the April options will expire. The volume should occur in large blocks of 100 contracts or more. In the First Data case, not only was most of the activity outright sales, but there was also very little put volume. Clearly, the majority of these will not be takeovers or even profitable trades.
Implied volatility, or value of the option, should increase even if the price stock does not. Also, read analyst reports to get a gauge on takeover valuation. The problem is that as people start piggybacking on the transaction, the volume swells further and draws even more people into what might not be a predictive or valuable trade. In this case, that would mean buying stock against the calls they sold. Electronic trading allows parties that might be privy to, or have a hunch about, a possible takeover to execute a fairly large option order quickly and, more importantly, anonymously. Even though options offer an unlimited supply, unlike with stocks that have a limited number of shares, if demand is greater than the desire to sell, then price will increase. Here are some basic criteria for separating the wheat from the chaff and, more importantly, identifying what options might deliver good returns and how to avoid chasing the activity that ends up being useless noise. Four calls traded for every put, which also indicates it was bullish rather than hedging activity.
This would suggest institutional buying, rather than retail customers trying to find the next hot stock. But if they think the buying is smart money, they may choose to hedge using other options. This rise in IV reveals the level of demand for the option. By using options as a hedging vehicle, the market makers, who also tend to be smart money, are using the leverage of options to endorse or buy into that whoever is gobbling up these calls seems to have an inside line on upcoming positive information about the company in question. Web sites, or if you are willing to wait until the next morning, you can find free delayed data at the Options Clearing Corporation Web site. The UOA toolbar on their platform alerts to these sort of setups all day long. Again, make sure you trade the name for yourself, not just because you saw a large order go through. Literally hundreds of thousands of options orders are reported every 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.
The process of breaking down what is considered to be valid unusual options activity can be daunting. However, when you buy either, your downside is always limited to your capital invested. It seems like a lot of analysis to perform on one trade, but options scanners can handle all of this for you in a very streamlined way, taking out a lot of the guess work. UOA for my main trading plan, extremely profitable situations can arise from such scenarios. Compare volume to open interest. The average sized trade for that particular name must be compared. Pull up the chart for yourself. So you want to know how to find unusual options activity? Trade Ideas is evolving their options related tools on a daily basis, so watch for changes moving forward.
Size vs Daily Avg. Roughly 4 times the normal volume would typically qualify as unusual. Although UOA is tricky, using this method can see potential gains that are ridiculous. Following up on this trade several days later, we can see that the action shown on the previous chart was where the high was put in. Trades at or above the ask tend to be much more significant. This is another valid method used for how to find unusual options activity. However, trading UOA can be tricky. Another option for how to find unusual options activity is with a scanner like Trade Ideas. Therefore, an increase in implied volatility is a more valid trade signal than a larger order that has a lesser impact on IV. Trade it for yourself, with smart money as your reassurance. Microsoft trades much more than that on a daily basis.
LM is showing 26. UOA is typically sparked by hedge funds and institutions, as they trade the options market regularly with very large trades to profit profits on the massive leverage that options can provide. Analyze what you see. Never take a trade simply as a result of smart money activity. LM, I can watch the order flow throughout the day, or see where that 26. Such a trade would indicate that the buyer was very aggressive, and willing to pay the premium price to execute the trade. 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. Note that timing on some of these can be crucial. Read more about time related options trading in The Value of Time.
Several viable platforms are available like OptionAlert and Wiseguys. However, the UOA calls may have paid off for those that spotted it sooner. Generally before an earnings announcement, options become expensive due to the uncertainty surrounding the event. Notice that Apple options are active. Maybe those call options were bought because investors are bullish on its future. Traditional mutual fund and ETF investors can learn a lot from traders, more than I first imagined. These trades will show up on your options trading platform.
On the other hand, check out these options traded in Conagra Brands, Inc. However, after the earnings are announced, the options become cheaper. If you see a juicy options trade hits the tape, you better believe that people will be tweeting about it. For example, in the case of Wyndham Worldwide, they recently announced earnings. What can you do with this information? For example, compare volume to open interest. In addition, Livevol has a tools page that tracks this type of information too.
Given that fact, we know that this is a new position. What does that tell us? For example, in the beginning of this post, we mentioned how one trader recklessly piled into LYB puts. Generally speaking, traders look for opening positions because they are easier to read. That said, someone buying options a day or two after earnings is getting a relatively good deal on them. Because these option traders ended up making a killing on this trade. That said, there are a couple of other good free resources that you can use to identify these type of trades. These options were set to expire worthless in a matter of days, but turned out to be a big winner. Keep an eye out for stocks that are trading at four or even five times their usual volume and place your trades accordingly, says Andrew Keene. Also, I look at calls, like TSO.
These are February 60s. The more times multiple, the more I keep an eye on something. When I have all those criteria I can put on a risk versus reward setups. The stock was trading 22. SPEAKER 1: On a daily basis, how many trades do you find that reach five times normal volume? The next thing I always look at is I want to see the open interest across the whole board, so yesterday in TSO this was the biggest order on any strike, any expiration, so that makes me want to put on the trade a little bit more, and then I look at the chart. What is unusual option activity?
Is it a lot that you have to then choose from? Is it just the biggest changes or kind of what creates the difference? SPEAKER 1: Andrew thanks for your time. ANDREW: My criteria are the first thing I look at is the volume versus open interest, so I always want to make sure the volume is greater than open interest. ANDREW: I trade a lot. Stock options are the same way.
SPEAKER 1: Of that 20, six to ten, what are you looking at? SPEAKER 1: My guest today is Andrew Keene from Keeneonthemarket. Yesterday we saw an interesting one in TSO. This is a bullish neutral method. Yesterday in TSO the chart was actually very, very bearish, but I still put on the trade, so I want to make sure the chart line is up. Andrew, first of all, what do you kind of watch when you see unusual? My bread and butter is when I see a huge put seller. The chart actually looked very, very weak. ANDREW KEENE; Keene on the Market. Every stock is specific. SPEAKER: Thanks for your time.
ANDREW KEENE: the way it works is every single stock has options. ANDREW KEENE: Thank you. SPEAKER: How will you trade this? SPEAKER: You are watching the Money Show. OptionsCity: Why is open interest important to watch in relation to unusual options activity? Salomon and Bank of America traders and developers built a scanner for use on the institutional side. Equally important is whether or not a position is opening or closing.
Brokers technically must label trades as opening or closing, but this not to be relied on. As with any method, UOA is still subject to general market climate and other factors. SPX, SPY, or VIX, or in stocks like Google, they are too heavily traded. Fast forward to 2014 when we started working with some New York developers, who helped us release OptionHacker in July. OptionsCity: What is unusual options activity? For an example, look at action in the December 1 session, we saw upside call buying in several oil and gas names. OptionsCity: Why are options markets so important for traders and investors to watch? OptionsCity: Any last thoughts on the importance of unusual options activity? Differentiating open and closing positions, or mistaking a hedge for a speculative position.
OptionsCity: Traditionally how have traders been able to access this information? Voorheis: The concept dates back to open outcry on the exchange floors. Could it work out? This is where unusual options activity comes in. It would be like watching for a drop in an ocean, as opposed to a bucket. OptionsCity: What are some pitfalls that can occur when analyzing unusual options activity? Broader circumstances can and will prevail.
Sure, of course it could. If an institution is buying calls to hedge a short stock position, it is not a trade I want to follow. Voorheis: Institutions like hedge funds have access to resources few others do, such as teams of analysts holding advanced mathematical degrees, dedicated to back testing strategies. Anyone can trade based off of it. OptionsCity: What type of trading strategies can be based off of unusual options activity? Say one sees a large put seller in a thinly traded stock, they might do several things. What exactly is unusual options activity and how can it be used to help drive trading decisions? OptionsCity: How can retail traders access and analyze unusual options activity?
OptionsCity: How can this help make trading decisions? Voorheis: One reason is because it can tell you if a position is opening or closing. TSN, CYRN: Earnings Scheduled For November. Calls and puts are trading roughly even with the November 17 th 150. December 15 th 16. Leading the point gainers list this morning is Buffalo Wild Wings Inc. Also high on the point gainers list is Advanced Auto Parts Inc. December 15 th 57. Shares of Alcoa Corp. Shares of TJX Companies Inc.
Crude oil is falling and gold is flat. November 17 th 67. December 8 th 18. November 17 th 100. The volume on the 22. Asia was down and Europe is declining amid festering fiscal and monetary policy uncertainties, along with some disappointing data out of China. Lastly, some unusual put activity was seen in GameStop Corp. December 15 th 55. Varian Medical Systems Inc. The most actively traded contract is the November 15 th 12. Option volume is running at over four times the daily average on Tenet Healthcare Inc.
Also trading to the downside is General Electric Co.
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