Thoughts on unusual options activity?

[Jerkstore]

Scanning options intra-day for >5x the average volume and scalping the move of the big trader.

Its an interesting strategy. The biggest hedge funds/banks/traders have information we don't, so watching their activity could be beneficial if you play it right. Know that half of the orders could be hedges instead of speculation.

But I was wondering if anyone on this forum does this?

This is a very bad idea for a retail guy.

You have no idea what that late order is attempting to accomplish. No idea what else that trader has in his position. No idea if it's a vol bet or a delta bet or a hedge.

Even if you could be sure it's a delta bet, you won't know which direction works better for that trader without know his stock position. Ex: Buying hedged calls is a great way make money as the market drops.

I'd be shocked if any retail trader could show a successful track record doing this.

 

[Jerkstore]

"Scanning options intra-day for >5x the average volume and scalping the move of the big trader." - Highly likely 'two' big traders. Which one do you decide to follow?

"The biggest hedge funds/banks/traders have information we don't," - Less than you think. The bigger the market - this moves towards 0.

"so watching their activity could be beneficial if you play it right." - Highly unlikely you interpret 'why' correctly.

"Know that half of the orders could be hedges instead of speculation."- Much higher than that.

Spot on.

 

[Jerkstore]

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.

Smart money and Andre Keene do not go together.

 

[Jerkstore]

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?

You do any and all of the above.

 

[TommyR]

yes. you see a lot of 3 letter names buying or selling odd chf zero delta in massive . usdjpy they usually know ages before and this wont be a big one so probably less clear. i imagine they will be ko-ing some audjpy and usdjpy prdc's with discrete fixings so whats that above 105-108. i think they marked those at zero at the start so dont actually do anything except book large profit and remain solvent. soros usually buys billions of usdjpy and sells at the high when boj intervenes. hope this helps in assessing P(A given B) and you dont go in with an undersized position before it melts.

 

[Wheezooo]

"Ex: Buying hedged calls is a great way make money as the market drops."

I was a big fan of that one. Hate discussing the directional influences I allowed into my trading, but if I thought we were gunna crap... vol was low... that warm fuzzy feeling when the market shits and those calls are trading higher.

 

[Wheezooo]

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?

Pretty much what @Jerk-off-store said. You try everything. You break it up and go through different brokers. You try to place most of it OTC quietly (good luck with that... I'd crucify a broker if they didn't show me everything that everyone was doing). You see if any big counterparties are out there looking for size. (If you ever heard the expression 'size trades to size,' this is why. Sometimes you just have too much size for the market and have no choice but to wait until someone else provides you the opportunity). If you are taking off risk you will trade closer to FV or go to market, if you can't sleep at night you definitely go to market. If you are putting on risk, they have to come to you and pay the toll. If you take a lot of edge on a deal and want to get risk-off you might get extremely aggressive on the first half of the risk then back off on the balance... Once again, like Jerk-off-store said, you try everything.

 

[Sig]

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.

Given that insiders have to disclose their trading in options on their company stock I can't imagine the guy was in that CEO job much longer!

 

[Chuck Krug]

Sig: It was in Europe before 05/2006, there was no disclosure law yet.

 

[Jerkstore]

Sig: It was in Europe before 05/2006, there was no disclosure law yet.

Right before 9-11 I was working on a desk that sold thousands of puts to some lucky (wink wink) trader. Remember the boss man teaching the entire desk about skew and how good this trade was, ya know cause LOOK AT THAT SKEW LEVEL!

Apparently noone cared about that either.