Reading Options Flow

A Very Important Skill to Learn

While the process gives you a framework for generating Great Options Trade Ideas, the Options Analysis requires some know-how and practice.

In this article, I will explain the following:

Tools - Process - Reading Options Flow - Translation

What is Options Flow?

Options Flow is detailed information on options trades executed in the public markets. Options Flow contains bits of data that are retrieved and calculated from the millions of options contracts traded each day. As you can imagine, it’s a lot!

At the highest level, the flow is categorized by the Option detail, the size of an options trade, the time of the trade and where it traded (ie. which options exchange?). For example, 1 AAPL September 16th $160 Call contract traded at 11:05.23 am EST on the ISE.

Whether it’s one contract traded by a retail investor, or 20,000 contracts traded by an institution, the data becomes available.

Keep in mind, with so many options exchanges, a 20,000 contract order may have been executed in 100 contract increments 200 times over a 10 minutes or the whole day. The data will not aggregate the 200 trades and give you one trade of 20,000 contracts. Again, it gives you the number of contracts traded at a specific time on any options exchange.

But that’s not all the data you can get…

Tools Home - Home

You can gather significant information from each trade at the time of the trade. This includes the Greeks, Implied Volatility, the Stock Price, the side of the market the order traded on, Volume information, etc.

Every bit of information can be analyzed (and maybe over-analyzed). But we’ll get to that a bit later.

Let’s dig into why we want to learn how to read Options Flow in the first place.

Why is Options Flow Important?

Options Flow is very valuable because you get to see more of the investor’s decision-making process than you do with stock. In fact, the information you can extract from one options order is multi-dimensional.

For example, with options flow you could see the following:

  • What direction is the investor looking at?
  • Where do they think the Stock is heading?
  • What time frame are they considering?
  • How confident are they on the Idea?
  • Hints as to “why” they are buying those options?
  • Who is the buyer? (Yes! Sometimes you can get that answer.)

These insights are unique to options.

Tools - Process - Reading Options Flow - Translating to a Story

So, by following the large options order flow, we can see what the Top 1% of investors are doing, better understand the activity with a process, and then translate the facts into a story.

We can use our analysis, “The Options Story,” and match it against the other elements of our process like Technical Analysis, Data Analysis, and Fundamental Analysis.

For many of you, the “Options Story” will be the missing piece to an oftentimes messy puzzle.

How do you read Options Flow?

Now that you know what Options Flow is and why it’s valuable, I need you to learn how to read it. Remember all that other data we can get besides the basic time of trade, contract size, and where it traded?

It’s time you walked through your first order.

This snapshot was taken from the OptionsGeek Tools “Home” Page on May 27th 2022. More specifically, this is where you will find the Top Options Orders that traded by size (not aggregate as I described above).

Tools - Process - Reading Options Flow 1

Let's go Step by Step across the columns:

  • Step 1

  • Step 2

  • Step 3

  • Step 4

  • Step 5

Step 1

Let’s start by pointing out the Option detail, the size of the trade, and the time of the trade. Remember, these are the basics. I left out exchange because I don’t see much value in knowing the exchange it traded on.

Tools - Process - Reading Options Flow 2

“Size” = Number of contracts = 59,000
“Ticker” = CHPT
“Expiry” = Options Expiration = July 15th
“Strike” = Strike Price = $20
“P/C” = Puts or Calls = Call
“Time” = Time of the trade = 12:37:57.053 (A little overkill I agree)

Translation in a sentence:

At 12:37pm, 59,000 CHPT July 15th $20 Calls traded.

Practice

Now, for some of you that might be simple. Others may need some practice.

But that is the building block of Reading Options Flow. The faster you get comfortable doing this exercise the more I will be able to teach you.

Reading Options Flow will require you to do this simple exercise over and over (and over) again. Quickly! 

So, make sure you practice.

And I know you probably already have a few questions. Write them down.

In the next lesson, I’ll start layering in some higher-level thinking and connect the dots. They will probably answer your questions and lead you to even higher-level questions.

Lastly, make sure you understand the pieces well, like … What is Open Interest?

Tools - Process - Reading Options Flow - Translation

Reading Options Flow

While the process gives you a framework for generating Great Options Trade Ideas, the Options Analysis requires some know-how and practice.

In this article, I will explain the following:

  • What is Options Flow?
  • Why is Options Flow important?
  • How do you read Options Flow?

What is Options Flow?

Options Flow is detailed information on options trades executed in the public markets. Options Flow contains bits of data that are retrieved and calculated from the millions of options contracts traded each day. As you can imagine, it’s a lot!

At the highest level, the flow is categorized by the Option detail, the size of an options trade, the time of the trade and where it traded (ie. which options exchange?).

For example, 1 AAPL September 16th $160 Call contract traded at 11:05.23 am EST on the ISE.

Whether it’s one contract traded by a retail investor, or 20,000 contracts traded by an institution, the data becomes available.

Keep in mind, with so many options exchanges, a 20,000 contract order may have been executed in 100 contract increments 200 times over a 10 minutes or the whole day. The data will not aggregate the 200 trades and give you one trade of 20,000 contracts.

Again, it gives you the number of contracts traded at a specific time on any options exchange.

But that’s not all the data you can get…

Tools Home - Home

You can gather significant information from each trade at the time of the trade. This includes the Greeks, Implied Volatility, the Stock Price, the side of the market the order traded on, Volume information, etc.

Every bit of information can be analyzed (and maybe over-analyzed). But we’ll get to that a bit later.

Let’s dig into why we want to learn how to read this in the first place.

Why is Options Flow Important?

Options flow is very valuable because you get to see more of the investor’s decision-making process than you do with stock. In fact, the information you can extract from one options order is multi-dimensional.

For example, with options flow you could see the following:

  • What direction is the investor looking at?
  • Where do they think the Stock is heading?
  • What time frame are they considering?
  • How confident are they on the Idea?
  • Hints as to “why” they are buying those options?
  • Who is the buyer? (Yes! Sometimes you can get that answer.)

These insights are unique to options.

So, by following the large options order flow, we can see what the Top 1% of investors are doing, better understand the activity with a process, and then translate the facts into a story.

Tools - Process - Reading Options Flow - Translating to a Story

We can use our analysis, “The Options Story,” and match it against the other elements of our process like Technical Analysis, Data Analysis, and Fundamental Analysis.

For many of you, the “Options Story” will be the missing piece to an oftentimes messy puzzle.

How do you read Options Flow?

Now that you know what Options Flow is and why it’s valuable, I need you to learn how to read it. Remember all that other data we can get besides the basic time of trade, contract size, and where it traded?

It’s time you walked through your first order.

This snapshot was taken from the OptionsGeek Tools “Home” Page on May 27th 2022. More specifically, this is where you will find the Top Options Orders that traded by size (not aggregate as I described above).

Tools - Process - Reading Options Flow 1

We are going to start with the order at the top of that list.

Step 1

Let’s start by pointing out the Option detail, the size of the trade, and the time of the trade. Remember, these are the basics. I left out exchange because I don’t see much value in knowing the exchange it traded on.

Tools - Process - Reading Options Flow 2

“Size” = Number of contracts = 59,000
“Ticker” = CHPT
“Expiry” = Options Expiration = July 15th
“Strike” = Strike Price = $20
“P/C” = Puts or Calls = Call
“Time” = Time of the trade = 12:37:57.053 (A little overkill I agree)

Translation in a sentence:

At 12:37pm, 59,000 CHPT July 15th $20 Calls traded.

Step 2

Now, let’s go a little further and look at pricing. With Options, where the stock was when the option traded also gives us some reference.
Tools - Process - Reading Options Flow 3

“Price” = Options Price = $0.27
“Side” = The side of the market (from Bid to Ask) it traded on at the time of the trade = AskSide
“Stock” = Stock Price = $13.04
“Chg” = Today’s Change in Stock Price (Green =Up; Red = Down) = $1.24

Translation in a sentence:

At 12:37pm, 59,000 CHPT July 15th $20 Calls traded at $0.27 on the ask with the stock at $13.04, up $1.24 on the day.

Step 3

We’ll skip “Condition” for the moment and look at the remaining columns.

Tools - Process - Reading Options Flow 4

“Volume” = Total Volume on the day = 60,042
“OI” = Today’s Open Interest = 28
“IV” = Implied Volatility = 93.3
“Chg” = The change in IV points = 2.6
“Delta” = The Options Delta = 0.14 (“14” delta)

Translation in a sentence:

At 12:37pm, 59,000 CHPT July 15th $20 Calls traded at $0.27 on the ask with the stock at $13.04, up $1.24 on the day. The total volume for today on the July 15th $20 Calls was 60,042, with an Open Interest of 28. The IV is up 2.6 points to 93.3 and this option has a 14 delta.

Step 4

Lastly, “Conditions” gives us more information on how the option traded and who took the other side of the trade.  

Tools - Process - Reading Options Flow 5

“Condition” = SPRD/FLR = “Spread” and “Floor”

  • SPRD means that the option was part of a spread trade, which means there is another part to this trade.
  • FLR means that the “Floor,” another term for a market-maker, took the other side of the trade. I am not so concerned with this.

Translation in a sentence:

At 12:37pm, 59,000 CHPT July 15th $20 Calls traded at $0.27 on the ask with the stock at $13.04, up $1.24 on the day. The total volume for today on the July 15th $20 Calls was 60,042, with an Open Interest of 28. The IV is up 2.6 points to 93.3 and this option has a 14 delta. The option traded as a spread.

Step 5

If it trades as a “Spread” you can search the other leg (or legs) in 2 ways:

1. It will show up right near the original trade or somewhere on the list.

Tools - Process - Reading Options Flow 6

You can check by making sure the time is the same.

2. You can go to the Stock page by clicking the ticker and sorting by the Time column

Tools - Process - Reading Options Flow 7

Again, focus on finding the options trades with the same time.

Practice

Now, for some of you that might be simple. Others may need some practice.

But that is the building block of Reading Options Flow. The faster you get comfortable doing this exercise the more I will be able to teach you.

Reading Options Flow will require you to do this simple exercise over and over (and over) again. Quickly! 

So, make sure you practice.

And I know you probably already have a few questions. Write them down.

In the next lesson, I’ll start layering in some higher-level thinking and connect the dots. They will probably answer your questions and lead you to even higher-level questions.

Lastly, make sure you understand the pieces well, like … What is Open Interest?