Options Strategies using Order Flow

[Chris Paciello]

Hello,

Any good Options Traders here that use Order Flow/Unusual Options Activity as their main strategy? Or have taken Andrew Keene's course on it?

I would appreciate if I can ask someone who is good at trading Options some questions on unusual options activity?

Thank you

 

[1245]

I've never found a lot of value in following order flow. I know the Najarian brothers say they make money doing that. When I was a MM, I took the other side but I always hedged. I also found that hot money would run in and out of possible take overs and a very small percentage would be real. The other issue was that you never know what the option buying is doing. One time there was a VERY large buyer of OTM calls every three months, but the stock only went down. When I asked the broker, he told me the client had a large short positon in the stock and needed a hedge. To me, this strategy is too hit and miss.

1245

 

[Chris Paciello]

Thank you for the reply.

I was thinking the same thing and tried to find ways to read it with more actionable trades but it's still difficult to decipher which Is speculation or hedge.

Andrew keene uses it and has a good understanding of it

 

[i960]

No edge IMO. Not only is it hit and miss but the use of synthetics can entirely throw the thing off.

 

[sle]

No edge IMO. Not only is it hit and miss but the use of synthetics can entirely throw the thing off.

The whole point of using order flow in options is that you know buying/selling pressures in VOLATILITY, not in options (unless you are an HFT player). Synthetics don't really change anything.

In my experience, you get some value out of knowing long-dated vega flow. On the short end, gamma will dominate any edge you get from order flow anyway, IMHO.

 

[1245]

Thank you for the reply.

I was thinking the same thing and tried to find ways to read it with more actionable trades but it's still difficult to decipher which Is speculation or hedge.

Andrew keene uses it and has a good understanding of it

There are RIAs set up to replicate billion dollar investors based on their filings. This is even worse. Everything is delayed and they charge around 65 basis points to do the execution for you. I don't know who Andrew keene is, but you have no idea how successful he is at any one strategy unless it is documented.

 

[Chris Paciello]

When I first started looking into Order Flow/Unusual Options Activity/Sweepers, etc his name came across for this style of trading. He uses something called OptionsHacker to scan for these unusual activity along with Ichimoku Cloud. Finding which ones are actionable, if they are straight call buys/puts. 3x to 5x Vol to Open Interest.

I don't think using order flow by itself is a strategy but in conjunction with some other things it may be worth while.

 

[vanzandt]

Hey 1245. How goes it? I have a question.

This is kind of on topic here, .... at least in the same ballpark. Do the MM's have some kind of knowledge or can they look at their book and divine that something is about to move a stock? I mean, in a perfect world, that answer would of course be "no". But we all know there is a degree of how shall I say.... the secret handshake(?).

The reason I ask is, yesterday I added a few puts to my KMX position (DIM Aug Expiration). I used a step limit buy order that started right at zero time value, ie starting the bid at pure intrinsic value. The minute that clicked up one dime... the order executed.

Now I had accumulated several of these over the last week and was always getting filled at $0.60 ish over intrinsic value, so yesterday when I got that fill I thought "WTF, somethings up". Sure enough... this pig gaps up today on some BS news.

Could this be used as a harbinger in the future....? Say the situation replicates itself on another thinly traded stock, ie I buy one put and the order fires at almost zero time value.... It would seem, at least from the KMX example... the smart thing to do would be immediately go long the stock. (and vice versa if an order to buy a call fires right away... short the stock) Somebody knew something yesterday. Just curious for your opinion since I know you've been there.

 

[i960]

Synthetics don't really change anything.

1245 just gave you an example of how it can be relatively meaningless. It can be someone buying protection for an event that simply never happens, it can be someone replicating an opposite position via synthetics (-S + C = P), heck without which side was the aggressor it's even more meaningless (and I doubt any existing retail stuff tracking this is also tracking all the bid/asks in realtime).

 

[sle]

1245 just gave you an example of how it can be relatively meaningless. It can be someone buying protection for an event that simply never happens, it can be someone replicating an opposite position via synthetics (-S + C = P), heck without which side was the aggressor it's even more meaningless (and I doubt any existing retail stuff tracking this is also tracking all the bid/asks in realtime).

Seriously, did you even read what I wrote?

-- To impute anything from flows in volatility, you'd look at order flow and transactions in terms of vega (or root-time vega, which is even better). Synthetics or any delta trades will not factor into such an analysis.

-- Trust me, when SocGen issues a single name autocallable and has to sell 150k of 25-delta vega in 1 year, you will clearly know which way they are axed. You don't need special software for that - there will be a dent in the vol surface the size of Kim Kardashians butt.

-- Unless you are looking at something very liquid like AAPL, flow effect on the vol surface is very real. The real question is what do you do with that information. If you play mean-reversion, you might be drinking from a fire hose (i.e. the flow is not over yet). If you assume it's a trend, well, you better be right. Vega is a tricky market to play, as it's all understanding of players and what they want.

-- Most real size in single names does not trade electronically anyway, it's IBD desks making size markets and then printing them on the exchange. So what you get is slightly delayed changes in the vol surface, but these changes are usually very real and persist for a while.