When traders talk about “unusual options activity,” they’re describing action in a stock that is above its normal daily volume.  Some traders believe that if you track this type of activity, you will gain an edge, because the “smart money” is known for daring options trades.

For example:

At around 11 AM EST, a trader came in and bought over 8,500 April 7 $91 puts for $0.85. The stock at the time was trading around $91.21. In other words, a trader came in and dropped over $750K in options that would be expiring worthless in a matter of days.

However, maybe they knew, that whatever the company would say during its investor day conference, it would not satisfy Wall Street’s expectations. Because these option traders ended up making a killing on this trade.

You see, at one point LYB was trading at $88 and change. Let’s assume they didn’t get out at the lows, but got out when the stock was trading at $89 a share.

If they were able to accomplish that, they would have made a cool $1M+ on that trade. This type of order was extremely unusual; not only were these options expiring shortly but, in general, LYB doesn’t trade that many options on a given day.

On a normal day, we’ll typically see about 1,100 puts trade in the name. However, today we saw 14K trade… with 11k coming in those April 7 $91 puts.

Source: Raging Bull

Source: TradingView

If you think about it, poor people aren’t slinging $750,000 worth of options that are set to expire in a matter of days. You’ve got to have a pretty big bankroll to take a position like that, and only a well-informed investor or trades is going to take on a position of that size.

We might not know what their reasoning is, but once they place the trade their intention — and their insight into which way the stock is moving — becomes public knowledge.

And you know what else?

These trades will show up on your options trading platform.

For example, on April 28, 2017, Wyndham Worldwide Corporation (WYN) traded about 8.9 times usual options volume.

Source: Yahoo Finance

Early that morning over 5,000 calls of the Nov17 $100 calls traded when the stock was trading around $94.50 per share. If you look at the image above, from Yahoo Finance, you’ll see that the volume of the day exceeded the open interest. Given that fact, we know that this is a new position.

“Volume” in this case refers to options that are traded on a given day (bought/sold). “Open interest” refers to options that are currently open (long/short). Generally speaking, traders look for opening positions because they are easier to read.

Second, they look at the bid/ask spread. At the time of the order, the spread in those WYN calls was $3.00 by $3.70, and the order was executed at $3.70.

What does that tell us?

The trader bought 5k calls, dropping $1.8M on the trade. Now, if they tried to middle their order, say $3.35 and got filled, they could have saved potentially $175K, but they didn’t. To me, that says they have high expectations for this trade, and saving $175K is chump change.  

Even if you don’t know how relatively large this order is, there are ways to find out.

For example, compare volume to open interest.

Source: Yahoo Finance

Notice that Apple options are active. However, with so much open interest, it’s hard to read if traders are accumulating or getting out of positions; it’s just too messy.

On the other hand, check out these options traded in Conagra Brands, Inc.

Source: Yahoo Finance

The September $37 puts stick out like a sore thumb, right?

That said, there are a couple of other good free resources that you can use to identify these type of trades.


 Source: Twitter

If you see a juicy options trade hits the tape, you better believe that people will be tweeting about it.

In addition, Livevol has a tools page that tracks this type of information too. The bottom line, it’s readily available to anyone.

Now, once it’s clear that you’ve found an option trade that is an unusually large, aggressive and opening order, it’s time to figure out the potential catalyst.

For example, in the case of Wyndham Worldwide, they recently announced earnings. Maybe those call options were bought because investors are bullish on its future.

Source: Yahoo Finance

Generally before an earnings announcement, options become expensive due to the uncertainty surrounding the event. However, after the earnings are announced, the options become cheaper. That said, someone buying options a day or two after earnings is getting a relatively good deal on them. It doesn’t mean that the stock will move in their favor, simply that the options are cheap in terms of volatility.

Here’s where things get really intriguing.

The crazier the order… the more interesting. For example, in the beginning of this post, we mentioned how one trader recklessly piled into LYB puts. These options were set to expire worthless in a matter of days, but turned out to be a big winner.

What can you do with this information?

Well, you could use it as an indicator, a tool in your decision-making process. If very near-term options are traded, you could potentially trade the stock instead, since you have a good indication of the time frame, like the LYB example.

Overall, tracking these types of trades can provide an edge, but make sure unusual activity isn’t your only reason for getting into a trade. After all, we are speculating on whether the option order flow is bullish or bearish, we never know for sure if they are tied to stock positions or are part of some sophisticated multi-layered trade. Thus, unusual activity is always interesting, but it’s not always actionable.

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

Learn More

Leave your comment

Related Articles: