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Introduction

Some of the smartest investors in the world are managing some of the biggest Hedge Funds on Wall Street. Many of these Hedge Fund managers have made extraordinary returns over the years, and in the process, they have lined their pockets with billions of dollars. I call them “Sharks.”

Are all their trades profitable?

No. But each trade goes through a process to understand its risk profile. On occasion, the Shark chooses to use options rather than the stock. Because of the amount of money that they manage, which can amount to billions of dollars, the size of their trades is generally significant and stands out. These trade are known as “Unusual Options Activity,” or Unusual Options Volume.

What’s the Problem?

Over the years, professional traders have tracked these Unusual Options Activity trades with great success. This has led to an army of followers hunting for the next BIG WINNING TRADE! Unfortunately, most investors quickly realize that it is not as easy as it may seem. It does take work to narrow down what you are looking for. The most common problem stems from the pool of data, the lack of experience, and the sheer number of trades to filter through.

As an expert “hunter” of Unusual Options Activity, I have heard every possible question from hundreds of investors. These top questions inspired The Ultimate Guide to Unusual Options Activity.

1. Where is the best place to find Unusual Options Activity?

Finding the right service or information provider of Unusual Options Activity is like getting the most useful map for a Treasure Hunt. It’s extraordinarily valuable. Besides knowing what information to look for and where to find it, you want to be able to get the information quickly. The right service helps you avoid frustration, confusion, and it saves you time.

Here’s what I look at:

Chart of Unusual Options Activity

Click on the chart. Go to Menu / Options / Unusual Options Volume.

There are many different columns of data that you could filter by simply clicking the title of the column. I lean toward these:

  1. Volume:  This is the amount of total contracts traded for the day.
  2. Calls: The amount of Call options traded as a % of total Volume in the stock that day.
  3. Puts:  The amount of Put options traded as a % of total Volume in the stock that day.
  4. Relative Volume: The multiple of today’s volume versus the average daily options volume (not shown). For example, if today’s Volume is 20,000 options and the average daily options volume is 5,000 options, then the Relative Volume is 4.0, or 4x the average.
  5. Earnings: This gives you the most recent earnings date. “AMC” and “BMC” refers to the timing of that release. AMC means After Market Close. BMC means Before Market Close.
  6. Event: This area indicates if there is any announced event other than earnings coming up in the near future. For example, it may indicate a conference, investor/analyst meeting, or FDA meeting.
  7. IV: This is the Implied Volatility.
  8. IV Chg: This is the change in the Implied Volatility from the previous day.

2. What are you looking for and why?

The information I’ve shown you above is a high-level look at what transpired in the options market that day. There are usually 150 – 200 stocks (notice the number of pages there are) with Unusual Options Activity each day. While this is one of the best services to get you to a pool of ideas, now you have to figure out which trades are the best ideas.

Since we are looking for Sharks, then we must accept that Sharks buy options to open a position. They do this for two reasons:

  1. Options give them leverage.
  2. Options offer them limited liability.

Now, without going into too much detail, there is an easy way to determine which options were being bought or sold today. It’s not 100% certain, but it gets you started in the right direction.

If you click on the “IV Chg” title then you will sort the column from lowest % IV move to highest. If you click it twice, then you will see the highest % moves in IV. IV moves up when there is more demand for options. Interpreted another way, IV moves up when there are buyers of option. Remember, Sharks are buyers of options. This narrows down your search.

2 Questions to Ask Yourself

Once we have this filtered version of bought options we can start thinking about more specifics of what we’re looking for. Here are two questions I ask myself:

  1. Were the trades in both Calls and Puts or just on one side?
  2. Did they occur in one specific strike/expiration or were the trades generated across many different options?

For #1, You can easily look at the “Calls” and “Puts” columns to get a sense of what side the trades were on. For #2, we need to drill down a little further.

Finding the Individual Trade

Now, you can click on any stock symbol on the Unusual Options Activity chart to take you into the Options Chain area. Here you’ll see where the traded options contracts were distributed by Expiration date.

Finding Unusual Options Activity

This corner area has all the expirations for that particular stock. It will show you how many options traded in that expiration (“Volume”) and also whether the IV went up or down on the day. Again, this IV % Chg gives a more detailed look as to which expirations were more in demand.

If you click on the desired expiration date on the far-left column, then the options chain for that expiration appears. This gives you further detail on the particular strikes that were active.

Click the chart. Enter ticker, left hand menu/options/options chain.

3.  How do you know if the options were bought?

At this point, we’re on the right track. We have identified a pool of trades where it’s likely that options were bought and then drilled down to find specific expirations and strikes. Now we have to make sure that the options were bought. How do we do that?

Many beginners look at Bid% or Ask% signals, or Sentiment signals like Bullish Contracts or Bearish Contracts. Bid% is the % of options that traded on the bid. Ask% is the % of options that traded on the offer. It’s assumed that if the option traded on the bid then it was sold. Likewise, it assumes that if the option traded on the offer then it was bought. Don’t fall into this trap. 

Click the chart. Enter ticker, left hand menu/options/options sentiment.

Using this assumption, the machines analyzing this data for you are led to believe that these options were bought, which would indicate “Bullish” sentiment.

Be very careful.

This is an easy place where you can get the wrong answer.

I can’t stress it enough. It’s paramount that you identify bought options with a high-degree of certainty. If this assumption is wrong, then the whole process breaks down.

Jumping on a trade because you think a Shark bought it, means you have to be sure that the Shark bought it!

Gathering the Data

If you click the option that you are targeting, a screen pops up showing you the details of all the trades in that particular option. That means, we get to see the reports on all 4,217 options contracts that were traded. There is also more detail including “Volatility” and “Hedge.”  This is important.

Details of Unusual Options Activity

If we look at the data closely, then we can get even more conviction on whether the option was bought or sold.

Here we need to look at each trade. I will need you to pay attention to:

  1. The Time of the trade.
  2. The Price the option traded.
  3. Where did option trade, on the Bid or Ask. I highlighted “Ask” because we are looking for buyers.
  4. The “Hedge” number.  This is the stock price at the time of the options trade.
  5. Notice the Volatility number where the option traded. Remember, if it goes up then options are in demand.

For example, at 11:05:41 AM 75 contracts traded at $1.25, on the ask. The stock was at $77.42 at the time of the trade, and the Implied Volatility was 43.8.

Analyzing the Data

Now, notice the trades at 9:53:08 AM. The options traded at $1.25 when the stock was $77.27.

We know the stock started to rise because at 11:05:41 AM the stock was $77.42. At that time, the options traded at $1.25.

Fast forward a few hours later to 2:31:54 PM. With the stock even higher at $78.07, notice that the options were still trading at $1.25. This time on the Bid.

When stocks go up, generally, call options prices should go up.

Here, we saw something different. The stock went up, but the option price didn’t move. This indicates an option seller at $1.25. As the stock climbed higher, the market makers bought the options.

Also, notice how “volatility” went lower from 44 in the AM to 42 in the PM. That’s further indication of selling pressure.

Remember, how we got a “bullish” sentiment reading earlier?

In fact, this Unusual Options Activity was a Seller of options and not a trade we would want to follow.

4. How do you know if the trades are opening positions?

 Sharks buy options to open because they want the leverage and they like the risk reward that the option provides. So, to verify a Shark trade, you have to make sure the trades are opening transactions.

How can we be sure?

We can start by looking at the Open Interest (OI). The OI tells us how many open options contracts there are available in the market. Every contract has a buyer and seller on each side.

When the volume is greater than the stated OI, then it’s likely to be an opening trade.

For example, below you see that the $80 Calls have an Open Interest of 497 contracts. We saw 4,217 trade on the day. Since the volume is greater that the OI, then this is likely an opening trade.

Click the chart. Enter ticker, left hand menu/options/options interest.

5.  How do you know it’s not part of a spread?

It’s easy to verify if an option contract traded as a spread. Under “Condition” where we looked at the data, you will see terms like AutoExecution, Regular, SingleLegAuction, and IntermarketSweep. If the traded Options Contract was part of a spread, then the Condition will say “Multi-Leg.”

You then have to distinguish whether that options spread was bought or sold. Unfortunately, that’s the problem. It’s generally difficult to do.

The good news is that Sharks typically do not trade spreads. They keep it simple with Buy Calls or Buy Puts. For that reason, I generally avoid analyzing spreads when looking for Unusual Options Activity. However, I do get interested if a Shark is “rolling” out their position for more time. Essentially, this means that they sell an existing option and buy more time with a new one.

6.  How do you know if the option is a Shark?

This is a question I get often. My answer is always the same.

At the time of the trade, we don’t know who is behind the trade. But let me ask you: If you were in the ocean and saw a fin pop out of the water going at 20mph, would you be able to guess what it is? It may be a dolphin, but most of the time, it’s a shark.

Shark trades have a certain DNA. In one of my exclusive Educational videos, “How to Catch a Shark,” I walk you through a list of clues to look for and more professional advice. I think you would enjoy it. You can gain access HERE.

How to Analyze Unusual Options Activity

7.  What makes you good at finding these winning Shark Trades?

In a word: Experience.

Not only am I an expert in options. But, I’ve been hunting Sharks for a very long time. I speak to them. Know their language. I understand how they act and what they are looking for. Sometimes the smallest detail in a trade makes me see the whole trade in a new light.

The nuances matter.

Here’s a presentation I gave in San Francisco in August, 2019. It has more on Unusual Options Activity, the ideas I offer, and the absolutely incredible results!

Getting Started

Following this guide narrows down the 150-200 daily Unusual Options Activity trades by 90%. That gets you down to 15-20 trades. To get down to one idea, well that’s when you have to do some more digging.

A different type of digging. But, we’ll tackle that at a later time.

What’s Next?

Or get my next Winning Trading Idea by clicking below…

Trade Ideas using Unusual Options Activity