You can gain access to RB Technologies here , which will allow you to find similar opportunities in options markets. This informed activity is usually initiated by hedge funds and institutional traders. These insiders will use the options market to make very large bets to profit on the leverage that options provide.
Frequently they will use the options market to pre-position in advance of an impending news announcement, such as a takeover, that may not be public knowledge. Hedge funds are using options to a greater degree on a daily basis. Famed hedge fund manager Carl Icahn used options, not stock, to take his large positions in Netflix and Herbalife. Bill Ackman of Pershing Square, the noted adversary of Mr.
Icahn, used mostly options to take a very big stake in Target Stores stock. Options trading is at the forefront of many hedge fund strategies, and option volume is growing on an annual basis.
So our goal is to uncover what the big players are doing and follow along with them in the most profitable manner possible.
It requires knowledge, skill and diligence, but the payoff can be enormous. A call gives you the right to buy stock usually shares , while puts give you the right to sell stock. A call buyer would be taking a bullish stance, while a put buyer would be taking a bearish stance. Discerning unusual options selling certainly has value, especially on the put side, but the focus of this article will be on uncovering unusual options buying …specifically call options buying.
Unusual options activity is first and foremost identified by the size of the trade. One has to compare it to the average size trade for that particular stock. For example, 2, contracts traded in an Apple option would not be considered unusual, since Apple trades , option contracts or more daily. But 2, contracts traded on a less liquid issue would certainly be a more meaningful event. Normally times the normal volume would qualify as unusual. Another screen we employ is to compare volume to open interest.
Open interest represents exiting positions outstanding that still need to be closed. If the volume exceeds open interest, you know it is a new opening position, which has more informative value than a closing position. We also look to see that the large orders move the implied volatility of options in a meaningful manner. Implied volatility is just another way of stating the price of options. So a large move in the options price, represented by an increase in implied volatility, is a more powerful trade signal than a large order that has a lesser impact.
Finally, we look to uncover if the trade took place on the offer price, meaning the buyer was aggressively willing to pay the higher price to get the trade executed. Trades executed on the offer tend to be a much more meaningful indicator. While all this may seem to be a daunting process, there is an easier solution.
I use RB Technologies option scanners to screen out potential unusual options based trade opportunities, in a much more streamlined manner. The open interest was only 5,, so the size was 1. This trade fits three of our criterion employed, namely large call buying which is greater than open interest and takes place on the offer. That just leaves us to do some implied volatility analysis, which we will delve into below.
With the stock down 0. Normally, one would expect the call price to drop 0. The June 70 and I highlighted the comparative changes to arrive at our trading edge, seen in the table below.
This combination of volume and volatility many times tends portends a continuation of the upside in the stock, as the buyer of the calls is aggressively positioning in a bullish manner. All unusual options activity will not be this foretelling or profitable, but by following the big and unusual options order flow, many times we can follow along with the large hedge funds and institutions to put ourselves in a position to profit. Click image to view full size.More...