Unusual Options Trading - What it is and how it works

Unusual Options Trading - What it is and how it works

Unusual options trading activity is when there is an uptick in the number of option contracts being traded compared to the norm. This can be caused by smart money insiders buying or selling protection in anticipation of a stock move. Usually, when smart money is buying protection, it's a bullish sign as they are buying put options to protect their long positions from a stock market crash. However, it could also be a bearish sign if smart money is buying call options in anticipation of a rally. Either way, unusual options trading activity should be monitored closely as it can be a leading indicator for a stock move.

Benefits of using unusual options activity to spy on Wall Street insiders

If you're looking for an edge in the stock market, it pays to keep an eye on unusual options activity. This is because smart money – i.e. professional traders and hedge funds – often use options to place bets on future stock price movements. And when these smart money players are active, it can be a sign that something big is about to happen. Of course, not all unusual options activity is definitive. But if you see a lot of activity in a particular stock, it's definitely worth doing some more research to see if there's something going on that you can take advantage of.

How to use unusual options activity to your advantage

As any trader knows, the stock market can be a volatile place. Even the most experienced investors can find themselves caught off guard by a sudden crash or spike in volatility. One way to mitigate the risks of Stock Market volatility is to keep an eye on unusual options activity. We use Cheddar Flow's Option Scanner to find these trade opportunities in real-time. Unusual options activity occurs when there is a significant (and usually unexpected) increase in options trading volume. While it can be difficult to predict how the markets will react to unusual activity, it can often be used as a leading indicator of upcoming changes. For example, if there is a sudden increase in options trading shortly before a Stock Market crash, it could be an early warning sign that something is about to go wrong. Similarly, a sudden spike in options trading activity during a period of low volatility could signal an imminent increase in market activity. While unusual options activity is not always an accurate predictor of future market movements, it can provide valuable insights for traders who know how to interpret it.

Examples of recent unusual options activity on Wall Street

Rigged Elections

In the wake of the 2020 presidential election, there have been a number of unusual options trades on Wall Street. Specifically, there have been a number of trades betting on a sharp decline in the stock market if President-elect Joe Biden wins the election. This activity has led to speculation that Wall Street is Rigging the Elections.

Insider Trading

There have also been a number of insider trading cases involving options trading. For example, in 2019, an options trader made more than $1 million by betting on a drop in Volatility after the news of Jeff Bezos' divorce was leaked. This case led to a criminal indictment and a lengthy prison sentence for the trader involved.

Unusual Stock Trading

Some unusual options trades are simply strange bets that don't make sense from a fundamental perspective. For example, in 2016, someone bought $2.4 million worth of puts on Hertz stock, betting that the stock would fall sharply. This trade lost millions when Hertz filed for bankruptcy just a few months later.

Dark Pool Trading

Another source of unusual options activity is dark pool trading. Dark pools are private exchanges where institutional investors can trade without revealing their identity or intentions. This type of trading can lead to wild swings in the markets and can be very difficult to track.

P.S. Cheddar Flow's platform features state-of-the-art Dark Pool Monitoring, along with live charting and resistance levels. 

Option Trading Strategies

Finally, some unusual options activity is simply due to traders using complex option trading strategies. These strategies often involve buying and selling large numbers of contracts in a short period of time and can cause wild swings in the markets.

Future of unusual options activity trading

Recent years have seen a surge in unusual options activity trading, as smart money investors look for ways to hedge their portfolios against potential risks. While the stock market has been on a tear in recent years, many smart money investors are concerned that a crash is overdue. As a result, they've been turning to unusual options trades as a way to protect their portfolios. Unusual options activity can be a great indicator of where the smart money is flowing, and it's worth paying attention to if you're looking to get an edge in the markets. While it can be risky to trade on insider information, smart money option trades can offer a way to mitigate your risk and potentially make huge profits. Just remember to use stop-losses and manage your risk carefully.

By tracking and understanding what the big players on Wall Street are doing with their money, you can get a leg up on the competition. And while it may seem daunting at first, once you understand how it works, it can be a valuable tool in your investment arsenal.

If you’re looking for an edge in the stock market, subscribe to Masters in Trading Digest below for trading tips that will protect you.  A new digest issue is released every Monday, Wednesday and Friday.

Unleash Trading Sucess with Our Groundbreaking Trading Tool, Ebooks, and Masters in Trading Community Access!

Limited Time Access! Only $7!

Find profitable trades with our Profit on Perimeter (POP) Tool for TradingView, available now for just only $7! You'll also get our exclusive bonuses – 2 FREE Ebooks and 14-day access to our premier offering, Masters in Trading Community. Don't wait – this is a limited time offer. Grab this offer now and fuel your trading success!