Thoughts on unusual options activity?

"You can watch the block order tape on LiveVol. It has made me believe that the pros are losing a lot more than they lead on."

I'm extremely curious. By what metric do you make that determination?
 
Attached is an example of "unusual activity". On 7/3/19, there were 2 block orders for MYL 20 8/16 calls. 24927 contracts @ $1.23 (midpoint), regular, not a spread. On 7/29, MYL announced a merger with PFE and the underlying briefly went above 21 before dropping again and the calls expired worthless. So it was probably a hedge for a short MYL position, based on some leaked news. I have the data to dig up dozens of similar cases. My point was that merely following large single-leg options orders is not a viable strategy.
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"My point was that merely following large single-leg options orders is not a viable strategy."

Thank you very much for that. I was just curious how you were determining P+L. As for your point, I agree.
 
I had a friend who worked on a desk at a bulge bracket, and he had a CEO of a listed company, buying 1000's of puts (so to speak, to 'hedge' the 100,000's of shares he owned) days before a bad quarterly report came out.
 
Baozi said:
the issue is that it's very difficult to know if that position is really "the position" or simply a hedge to a play somewhere else.
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This is the most important aspect in this strategy directionally.

But one with strong knowledge of synthetics and hedging can (over the long-term) go with his gut and ride the outcome. Just make sure not any one trade can hurt your account and the numbers will statistically play out.

I met Andrew Keene in Chicago at his office and watched him trade. He's who I got this idea from since I saw him in real-time. It was pretty interesting. You have to be fully committed intra-day, this isn't a strategy you can do half-ass.

Follow the smart money isn't a bad idea if you know how.
 
Wheezo,

Highly likely 'two' big traders. Which one do you decide to follow? ---- Depends on the situation. You follow the one your gut agrees with, just like any type of trade placed.

Less than you think. The bigger the market - this moves towards 0.---- I agree, but as long as its less even by the slightest margin, they have information you and I arent privy too, and thats enough to profit big from.

Much higher than that. ------ Doesnt matter, even if its a hedge you can trade based off that. Exp: big order to buy calls comes in and you notice the stock is at its 52 week low, maybe they're hedging short stock. It all depends. After hours and hours of studying how institutional order flow works and its mechanics you develop the skill to detect each scenario just like any strategy.

Personally I trade these once in awhile. I allocate a very small % of capital to these types and usually play it when things are quiet. My portfolios consist of various strategies to keep the juice flowing.
 
qlai said:
Interesting topic. I've been watching some videos where the guy claims to use both stocks and options orderflow. So in one video he was asked the same question - how do you know it's not hedging/legging?
While he did not explain the algo they use(it generates alerts), he said that they can usually tell the difference. My understanding is that they look at aggressiveness of the orders such as orders sweeping multiple exchanges. I believe he mostly trades weeklies, so we are talking short term moves. Also, options on stocks which are liquid, but not to the point where there's so much activity that it's very hard to read orderflow.
Conceptually, I can see how "informed" people can easily front run equity moves with options and it is more difficult to hide options activity than stocks'. So, to me, it sounds like a valid concept, although I haven't tried it yet.
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Which video?
 
"Exp: big order to buy calls comes in and you notice the stock is at its 52 week low, maybe they're hedging short stock. It all depends."

Do you have a way to separate spec flow from large delta-neutral traders? I say this as someone who except for one or two years was always the 2,000-pound gorilla in the room, and never once did I execute an option as a purely directional trade. So any assumption based on my orders would be incorrect.

Now there were occasions I would see another large institution fishing around some "I want to buy the 80delta call and sell the 80delta put against it, and you knew what was coming behind that nonsense. Then i would get long.
 
Wheezooo said:
I say this as someone who except for one or two years was always the 2,000-pound gorilla in the room, and never once did I execute an option as a purely directional trade. So any assumption based on my orders would be incorrect.
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Would you mind sharing the mechanics of executing large options orders? Do you go to the market or do you find counter parties elsewhere? Is there IOI for options?
 
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