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Unusual Option Activity – 4 Tips On Tracking Option Volume

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unusual option activityI’m often asked how I track the unusual option activity that I provide for my subscription service and quoted in major publications in the past. For the last several years, I have been very secretive and have not divulged that information to ANYONE! After many years of dodging this question, I am ready to reveal the tools that I use, how to understand the unusual option activity, and most importantly, how to trade it.

As you know, good options traders use leverage to make profits with minimal capital. Being a buyer of an option is a low probability trade since sixty percent of options expire worthless. To succeed in making a large profit in calls or puts, I believe you need to know where big money is going in the options market. Being able to spot where money is flowing in the options market will typically give you an edge to keep you ahead of the crowd. I have often noted that unusual option activity signals a potential large move.

The reason why unusual option activity often signals a potential large move is because “insiders” will typically act on information they hear or have a heads up on news that will cause the price of the stock to move. These insiders will scramble into the options market to make very large bets to profit on the leverage that options provide.

I remain the best in the business for being able to spot and track this type of activity and deliver the information to my clients through my subscription service. Many try to duplicate or even copy what I provide, but my insight and experience always prevails.

The activity in Aruba Networks Inc. (ARUN) today is a perfect example. On Fridays, I have a live chat room open for members so that we can trade weekly options together. At 10:58 a.m. EST, I was running through my typical morning scans to track unusual options activity and I picked up on some big buyers of the March $23 calls at $0.40 per contract.

Below you will find a list of the top ten orders for today and you can see they came in at 10:39 a.m. EST as buyers of large blocks of these contracts.

unusual option activity

Top 10 Orders In Aruba Networks

This type of action always gets my attention because these are buyers of call option contracts that expire in seven days, two of which are non-trading days. The only way these call options will profit is if prices move higher by next Friday.

If you look at the 1 minute chart below, you will notice a large spike in volume at the exact same time that those call options were bought.

unusual option activity

1 Minute Chart Of Aruba Networks

Right after that activity hit, the price of the stock continued to move another $1.00 higher. Those call options that were bought reached a high of $0.85 per contract and finished the day at $0.70 per contract. I alerted members in my chat room that, “This is looking like it can make a push as the calls are being bid up about $0.15 by the buyers.”

Unusual option activity is only an indicator. In my opinion, it is the most real time indicator available because it shows me where the money is going in the options market. I typically pick up on the unusual option activity and apply technical analysis to filter out ideas and find the trades that have the best risk to reward.

Unusual Options Activity – Here are my four tips:

1. Volume – Compare the call/put volume versus average daily trading volume. Take it a step further and compare the volume in a particular contract with prior open interest. I like to see the volume at least three times the average daily volume. If the volume is greater than the open interest, then you know that there is some unusual option activity. If you’re wondering if the volume is new, then look the next day to see the change in open interest.

I like to see option volume occur in large blocks of 100 contracts or more. This size indicates that the volume is a result of institutional buying rather than retail customers trying to find the next hot stock. The institutions tend to be the smart money and that is who I want to follow.

2. Go Backwards – When you notice a change in activity, look at the options in the front two months to see if anything catches your eye.

3. News – Unusual option activity does not happen in a vacuum. There is a reason for it and it is often connected with the headline news of the day. You’ll want to keep current of the news in the industry as well as press releases about conferences and other significant events.

After you have identified what looks to be some unusual option activity, you’ll have to determine if the activity is opening buys or sells. To do this, look at the Bid and the Ask on the contracts and watch to see where the last trade price is, to see if traders are aggressive in selling the option (hitting the bid) or buying the option (willing to pay the offer).

4. Spillover – Look for spillover into other strike prices. Market makers will typically take the other side of the trade. In other words, they want to remain delta neutral by selling calls to facilitate the transaction, and then, they will immediately offset their position utilizing the underlying stock. That means that they are buying stock against the calls they sold. However, if they think the buying is a result of smart money, they may hedge their position using other options which results in a spillover into the purchase of calls at different strikes.

Unusual Options Activity Conclusion

I hope that you learned something from this information and that you can benefit from the tips that I shared today. I challenge you to start looking more into the options chain when looking at different ticker symbols.

As I mentioned above, I am ready to teach those that are interested in learning more about the tools I use, how to understand the unusual options activity, and most importantly, how to trade it with, which I call it my SIZZLE Method. I am currently putting together a course and if you are interested, make sure you sign up below. I will be providing an Early Bird Special, so be sure to watch your email box for details.

Go here for all the details: My SIZZLE Method

9 comments… add one

  1. another great one………i ll wait for it !!

    Reply
    1. Hello Maria,

      Thank you. I was just rereading this. I think this has to be the best article I have put together thus far. Thanks for reading.

      Reply
      1. Great article and information ! thanks Joshua

        Reply
        1. Steve,
          You’re welcome!

          Thanks for reading and leaving a comment.

          Reply
  2. Nice workflow

    Reply
  3. Hey Josh, would obviously rather know of any unusual options activity the day before a big move. For example, did you detect anything in ARUN pre-earnings? That would have been a windfall…not quite like NFLX, but still…

    Reply
    1. Larry, I ARUN there were put buyer into earnings the day before, but I didn’t track it into. Trying to get in edge on earnings in heavily followed names doesn’t work to well. They are heavily followed and traded and the order flow consistent of hedging. Tracking less followed names like AWAY can provide an edge. Big buyers were coming into calls before earnings and were positioned for the large move.

      Reply
  4. Course I am in the here and now, 1 year later

    Reply
  5. Thank you ,very useful article

    Reply

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