Do you know what it means when a stock has unusual options activity? Open interest shows the amount of open options contracts. When you see a usually large amount of open interest with particular strike prices, a potential big move is about to happen in the stock because this is where big money traders are sitting.
You might think the stock market is a loud place, and I’d have to agree. With all the movement, activity, and chatter, it’s easy to get lost in the noise.
But what if I told you that the clues for your success lay underneath all this noise? What if these clues were whispers just waiting for you to hear them?
The answers are there if you take the time to listen. You can learn how to profit from unusual options activity if you take the time to listen to the whispers.
Options Trading Course
Table of Contents
Unusual Options Activity Introduction
Options are the drug of choice for hedge funds and large institutions due to the massive leverage and profits options provide. For these reasons, hedge funds and institutions frequently spark unusual options activity (UOA). They commonly position themselves before pending news announcements (i.e., an upcoming buyout or bankruptcy) that have not yet gone public. Not surprisingly, these people on the inside are often referred to as “smart money” because they are in the know.
Options are traded regularly in options markets – no surprise there. But, when activity on an option starts to look unusually high, it is a sign.
Unusual options activity (or “UOA”) can be a “giveaway,” so to speak, that there could be a significant move in the underlying stock shortly.
Make sure to take our options trading course. That way, you can learn the basics of options and take advantage of UOA.
Perspective
Let’s look at an example of SPY options contracts to put this in perspective. That same day, people traded over 2.2M SPDR S&P 500 (SPY) options contracts.
A lot, right? It’s not because the daily average of SPY contracts traded is 3.8M.
The takeaway is: It’s not the size that matters; it’s the relative size. In other words, 6,000 contracts traded in DLPH is unusual; 2.2 million contracts traded in the SPY is not.
Take a look at this unusual options activity example of JD. The 27 and 62 expiration dates had average open interest of 100-200. However, the 34-day expiration had open interest between 10,740 and 32,595 on the out-of-the-money call options.
Unusual Options Activity Example
- Have you heard of Delphi Technologies? Well, on January 14, 2019, there were 6,738 calls of Delphi Technologies (DLPH) traded.
- You’re probably wondering what makes this order stand out.
- For two reasons:
- On average, Delphi only trades about 600 options contracts.
- On this particular day, January 14, it traded about 11 times its daily average!
In our books, an unusual options activity order stands out and is relatively large. DLPH looks like unusual options activity, considering it was trading 11 times its daily average.
Let me ask you this: What if I told you that you could legally get inside the trading minds to copy the trading of the largest players on Wall Street?
Well, you can if you follow unusual activity options. Don’t be confused if you haven’t heard this term before. We use this term to describe stock options experiencing greater than average volume.
DLPH Options Trade Summary
6,500 DLPH March 17.5 calls traded for $1.00
- Someone spent $650,000 in premium’s for the options contracts
- At the time of the order, the stock was trading around $16
- Open interest was 300
- DLPH earnings were after the time of the unusual options activity.
Writing on the Wall
Let’s look at another example. Before closing on Friday, January 11, 2019, a trader bought 4,674 Pacific Gas & Electric (PCG) 12 puts for $1.00 per contract.
At the time of the trade execution, the stock was trading at $17.50. Now, one would think this was a reckless bet, especially considering how far out of the money these puts were.
But, if you were following the news, this bet was not as crazy as it appears….
For those of you familiar, this was the time of the wildfire that caused 86 deaths and destroyed around 14,000 homes, along with more than 500 businesses and 4,300 other buildings. Moreover, it’s believed the fire began when a PG&E power line came in contact with nearby trees.
Rumors were rampant that Pacific Gas & Electric wouldn’t survive the liability charges of $30B from the deadly wildfires in California. In this case, the rumors were true, and in a public filing, they cited $7 billion in claims from the fire.
Not surprisingly, PG&E, California’s largest utility company, would be filing for bankruptcy.
Predictably, PG&E (PCG) shares plunged 48% when the market opened that Monday. When you do the math, those puts bought on Friday rose by more than 366%. If they took profits, they made approximately $1.5M in profits.
Not too shabby for a day’s work if you ask me.
Scanning for Unusual Options Activity
According to the game’s rules, every single option trade placed (electronically, on or off the trading floor) needs to be reported and made publicly available. Please read that again and let it sink in; every single option trade place must be reported and made publicly available.
You must always ask yourself: Why would anyone put such a large sum of money on the table in an option trade? One so big that it needed to be placed with a floor broker.
Maybe somebody knows something; maybe they are connected. This leaves us wondering how we can find the signal in the noise. We can use an unusual options activity scanner. One of our favorite and best value scanners for this is the quant data options scanner. Check it out. If you don’t want to pay for data…I suggest following someone on Fintwit.
We also have UOA reviews for companies like Black Box Stocks, Cheddar Flow, and Whale Stream, which are great for monitoring and trading UOA. Want to see into the options and understand the Greeks on a quant level? Some firms like TradyTic and Spot Gamma provide signals for UOA and Gann, Dealer Positioning, and volatility analysis.
Scanner Criteria
I’d be remiss not to mention that with any indicator or scanner, it’s not 100% accurate 100% of the time. You need not only to apply a few filters but also some brainpower.
Continuously ask yourself why there would be an unusual option activity. Don’t just read the news; read in between the lines.
To filter out the noise and hear the whispers, I like to ensure:
- Volume higher than open interest. If the volume exceeds the open interest, you know someone is opening a new position. Knowing this has far more informative value than that of a closing one.
- Don’t go near orders on an earnings month. More often than not, they are a play on earnings.
- Ignore actual size; relative size is more important. The first thing to remember is that looking for the biggest trades won’t get you too far. You need to compare the average trade size for that stock to the current trade size. As an example, take 1,000 contracts traded in a $MSFT option. It might seem like a lot, but it’s not considered unusual since Microsoft trades much more than that daily. Alternatively, those same 1,000 contracts traded on a less liquid name would undoubtedly be more significant.
- Any relative size over 5x is something to pay attention to
- Large spikes in implied volatility. Implied volatility (or IV) is the expectation of future volatility. Therefore, an increase in implied volatility is a more valid trade signal than a larger order with a lesser impact on IV.
Above the Ask or Below the Bid?
When it comes to evaluating an options trade – we can not always identify who was the one taking liquidity… since every trade has a buyer and a seller – when we see an option traded, we need to know if it was bought to open – bought to close … sold to open or sold to close. When the volume is greater than the open interest, we have an idea that it is a new trade – but we still need to know if this new trade was bought to open or sold to open… and that is where the options price can assist us. If the options trade was At the Ask or Above the Ask – it was likely bought to open. If the options trade price was at or below the bid – it was likely sold to open.
Unusual Options Activity Sizzle
On the ThinkorSwim Platform (TOS), we can look at the options data for great information. For example, “Sizzle.” Sizzle is what TOS uses to refer to a 5-day average. So, when we are discussing the call volume today and want to see if it is greater than the five-day average, we can look at the call sizzle. We also have the put sizzle, the Sizzle Index call sizzle minus the put sizzle), the volatility sizzle, and the volume sizzle. That is cooking!
The picture below shows $OPRA stock options and the put sizzle is 57.42! The Stock Volume is showing a sizzle of 23.6! To put this into perspective, if the volume today were the same as the 5-day average volume, we would have a volume sizzle 1.00. If today’s volume were 100% greater than the 5-day average volume, the sizzle would be 2.0. Today’s stock volume is massive, as is the volume of options.
Volume Average
While the paid UOA services mentioned above are great – even a broker like TOS can offer amazing insight and scanning capabilities for those who know where to look. TOS Sizzle is a quick and easy way to highlight UOA and track it’s activity through the trading day.
Some key things to keep in mind when considering the average options volume is … well, “what is the average?” If some stock has an average call volume of 40 contracts and today a 300 lot order comes in – there will be an elevated sizzle… but 300 contracts is “a lot” for that one stock and yet it really is not a lot of contracts at the end of the day… we would want to see more.
Also – when looking at unusual options activity we DO want to consider the stock volumes too; market makers will not want to cover all these options plays without hedging and that means they will be forced to cover those options trades with a hard Delta play that stock offers.
Final Thoughts: Unusual Options Activity
You want to know what the smart money is doing, and you will know if you listen to the whispers. While the criteria listed above are not a 100% guarantee, they can help you cut the noise so you can find the hidden gems in the market. One thing to remember is that swing traders are catching on all day because unusual options are hot to trade. Regardless of the options flow, make sure you understand the candle stick chart inside and out because just because it’s a lot of money being swept into a stock doesn’t mean the person on the other end knows what they are doing.
Frequently Asked Questions
Unusual options activity happens when a large increase in trading volume happens on a particular stock options contract that isn't typical. Investors watch for this large type of institutional activity from hedge funds.
Investors keep track of options flow to make informed trading decisions. It's important to know technical analysis and fundamental analysis before entering any options trade.
Unusual options flow activity locates options contracts that are trading at a larger volume than relative to the typical open interest of the contract.
