Unusual Options Activity – How to Trade Like the Big Boys

They say that the stock market is not an even playing field. The big boys have all the advantages – better information, more money, and a team of analysts working around the clock. But there is one thing that level the playing field somewhat – unusual options activity. By following these trades, you can piggyback on the positional bias of Smart Money investors such as hedge funds or institutions, and perhaps make some profits for yourself. Following unusual options activity is the best way to get an edge trading the underlying stock.

What is unusual options activity?

Unusual options activity is simply a higher-than-normal volume of options contracts being traded in the underlying stock. This usually happens when there is news or an event that is pushing the price of the stock in either direction. When there is unusual options activity, it means that somebody knows something that the rest of the stock market doesn’t know yet. And as we all know, knowledge is power in the stock market. This activity is often seen as a signal that something big is about to happen with the stock, and savvy investors will often piggyback on these trades to make a quick profit.

How to trade unusual options activity?

The first step is to identify which stocks have unusual options activity. You can do this by visiting any major financial website such as Yahoo Finance or CNBC, and looking for the “unusual options activity” section. Once you have a list of stocks with unusual options activity, you need to do your own due diligence to find out why there is suddenly so much interest in these stocks. Is there an earnings report coming out? A new product being launched? Once you have done your research and are comfortable with your findings, you can initiate a trade accordingly. Remember, always use stop-loss orders to minimize your risk! Or better yet, buyers of options (calls or puts) have a fixed amount of risk. Trading options with known risk is the same as trading underlying stock with a stop order.

How can I spot unusual options activity in the stock market?

Options traders use a variety of methods to identify unusual activity in stock options. The most accurate and efficient way to find Unusual Options Trading opportunities is to use a tool like Cheddar Flow's Options Scanner. We like Cheddar Flow's tool for its affordability, smart order tracking features, the ability to filter real-time data, and even monitor dark pool activity. 

There are other techniques to spotting this activity. One common technique is to compare the volume of options traded with the average daily volume. High relative value on the underlying stock might present an unexpected catalyst. If the options volume is much higher than normal, this may be an indication that something is happening in the underlying stock that option traders believe will affect the price. Another technique is to compare the prices at which options are being traded with the prices at which they were trading previously. If there is a sudden change in option prices, this may be an indication that something is happening in the stock. Traders can do the same thing when comparing implied volatility to the historical volatility that options contracts have traded.

Technical analysis helps spot unusual activity in the options market

Another helpful tool for finding high probability trades is to use technical analysis. This involves looking at charts of past price movements to identify patterns that may repeat in the future. Technical analysis can be used to find both long-term and short-term trading opportunities.

Consider the risk/reward ratio of trading unusual options activity

When you are considering any trade, it is important to consider the risk/reward ratio. This is simply the amount of potential profit versus the amount of risk involved in the trade. A higher risk/reward ratio means that there is more potential profit for each unit of risk taken on.

No matter how good a trade looks, it is always important to manage your risk properly. This means not putting all of your eggs in one basket and diversifying your portfolio so that you are not overly exposed to any one stock or sector. At Masters in Trading, we manage risk in the stock market by never risking more than you are comfortable.

There are a few risks associated with trading unusual options activity. First, it is important to remember that not all unusual options activity is created equal. While some activity may be indicative of a genuine opportunity, other activity may simply be the result of speculation or manipulation. Second, even if the activity is genuine, there is no guarantee that the stock will move in the direction you expect it to. Finally, because these trades are often made on margin, they can result in losses that exceed your initial investment.

How can I mitigate risks in unusual options activity?

There are a few ways to mitigate the risks associated with trading unusual options activity. First, it is important to do your homework and only trade on stocks that you have thoroughly researched. Second, it is important to use stop-loss orders or limit orders to protect yourself from excessive losses. Finally, it is important to remember that these trades should only make up a small portion of your overall portfolio to minimize your risk exposure

What does unusual options call flow in stock market mean?

An “unusual options call flow” in the stock market generally means that there is an unusually high volume of options trading taking place. This could be a sign that investors are anticipating a big move in the stock's price and are buying or selling options to profit from it. The same would be true for “unusual options activity” in the puts. This might mean the stock trades lower,

while implied volatility trades higher. Unusually high interest in an options contract is a strong sign of an unexpected catalysts in the short term.

Unusual options activity can be a great way to piggyback on the trades of Smart Money investors and make some profits for yourself. By identifying stocks with unusual options activity and doing your own due diligence, you can find out why there is suddenly so much interest in these stocks and trade accordingly. But always remember to use stop-loss orders to minimize your risk!