Confused about what unusual options trading activity means? You’re not alone. A very large options trade, which appears as heavy money flow or volume in a chart, can look like a bit of a mystery unless you understand what’s happening.
What unusual options trading activity means
As Jim Cramer likes to say, volume is a lie detector. I have been following “the flow” for many years now, and I agree. When a lot of money is flowing into a security or option, that typically means institutions feel really good about it. Note I said “typically”. Always following the big money could certainly lead you astray. I do not rely on it 100% of the time, but I have found success about 70% of the time – pretty good odds.
Since February, we have seen four big money Amazon trades, and they all paid off. The flow was a risk reversal (long a call, short a put) for some heavy dollars. So far, this (likely one) trader has made about $120 million. Not bad!
Just last week, a decent flow trade hit on the SPY calls. It was a butterfly trade; 20,000 fly’s were bought, corralling the 300/310/320 October strikes. This trader paid 18 cents, or a cool $360,000 to open this up. If the SPY lands at 310 at the October expiration, the trade will be worth $20 million.
Like I said, I don’t always follow these trades. They need to make sense. The butterfly trade makes sense. It would only be a 10.7% gain over a three month period, but I may end up riding this horse to the finish line.
How to track money flow
There are some great tools out there, some of them fairly new.
LiveVolPro is like a Bloomberg for option traders. The software provides you with time and sales data from 2011 to present, alerts, watchlists, scrolling trades, scanning and filtering capabilities. You can sign for a free trial here.
I am also partial to Henry Schwartz’s trade-alert.com, a fantastic tool that pulls the data quickly in an easy-to-read format. His flow analysis includes directional sweep and complex order aggregation, unusual volume alerts, expert commentary, historical data and more.
If you don’t believe in “the flow”, track it over the next few months to see which trades work and which don’t. Maybe you’ll become a believer, like me.