Unusual Option Activity

[heavenskrow]

Throughout the past few months while I have been daytrading, I would get notifications from a person in TOS chat or a seminar after the markets have closed of unusual option activity.

One activity was in XOM puts before crude oil tanked much lower. The other was in TLT 122-124 call spread right before the FED announcement in which yields tanked. How exactly as a trader do you get notification of the big bets by these big players? The premium is at least several million+ $ that they are knowing they can lose and the track record so far is 2-0.

 

[heavenskrow]

Well of course it was after the fact????
But with the major purchase of TLT calls were before the announcement.

 

[enjoytrading]

Someone always seems to know. Similar unusual option activity happened on Transocean the day before news of the corruption probe broke and the stock dove 10%. The Volatility app (https://www.getvolatility.com/) tracks this stuff pretty closely. I'm thinking of adding in alerts to it in the long-run so that you can be easily notified when it happens. The demand column in the image below is the day's volume compared to its average trading volume over the last year.

I agree with xandman that it can often be misleading. You need to look for ones where the volume is a big outlier compared to averages (3+ sigma events). For Apple, Facebook, etc, in the image, the demand is not very interesting. For Transocean, I think it is.

 

[xandman]

I retracted my statement as I realize that I am not making a meaningful contribution to this thread. Let me dig up some good research to compensate.

This seems interesting. Hard to believe there aren't more out there to prove or disprove. Unusual options activity before 911. It's the same paper.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=370741

http://voluntarysociety.org/conditioning/conspiracy/911/insidertrading/unusualoptionactivity.pdf

You may be on to something.

 

[rmorse]

It is my understanding that optionMonster (Najarian brothers) base most of their trading on option flow like you are suggesting. They like to follow the "hot money". I have no experiance with that type of trading, since as an x-market maker, I was always the other side of hot money. As long as that hot money was not right before I could hedge, it often worked out well for both of us.

Part of the problem with this strategy is that often the option flow seems obvious as to their strategy, but sometimes you can't tell. In one trading crowd I was in, there was a large option buyer of the 50 cent OTM call every three months. I later found out the customers had an enormous short stock position they were hedging. The stock went down a lot over time. You just can't always tell what they are doing.

Bob

 

[heavenskrow]

"An hour before Fed's decision, when iShares Barclays 20+ Yr Treas.Bond (ETF) traded at $118.83, a trader bought 51,000 contracts of the October 121/124 call spread for $0.66 per share. Total premium amounted to $3.3 million and a trade of such size increased significantly options volume in the name, setting it at 3 times average daily options volume.

The call spread expires in a week and a half before the next Fed meeting and Nathan believes that there is going to be a similar situation before the next meeting. He thinks that this trade is very interesting because it was a contrarian trade. iShares Barclays 20+ Yr Treas.Bond (ETF) traded lower lately because traders expected rates to go higher."

I was of course watching ZB while a person in chat notified the room of this activity. I looked at the ZB chart and it was sitting on important support. So having it sitting on support and having a big trader behind me felt like a good trade but I was still uncertain, because the Fed could have done anything....but I should have bet big since even Ray Dalio wasn't expecting the FED to move and gold/silver has been rallying strong into the announcement.

However lately the long end has been weak lately, despite the fear in market which is something interesting to note.

 

[heavenskrow]

I agree with xandman that it can often be misleading. You need to look for ones where the volume is a big outlier compared to averages (3+ sigma events). For Apple, Facebook, etc, in the image, the demand is not very interesting. For Transocean, I think it is.

Right, that's what I mean by unusual option activity----"You need to look for ones where the volume is a big outlier compared to averages (3+ sigma events)."" If there is a way we can get alerts on these plays, I think it would be a good tool to add your trading toolbox. Only way I found from reading other threads is the Sizzle Index on TOS.

 

[smile]

You may want to look at Livevol:

Livevol functionality videos:

http://www.livevolpro.com/help/tabs.html

https://vimeo.com/livevol/videos

The videos linked above helped me get a sense of the power of Livevol

 

[xandman]

You might like this. It is very informative. However, you have to make a broad assumption of whats going on then be able to take the converse of your assumption when the change in volume or change in implied volatility say otherwise.

Unfortunately, there is no historical data, so you could also be catching the reversal or unwinding of a position built over time. It can be quite convoluted. Think Princess Bride (movie) wine drinking scene.