Imagine knowing where the ‘smart money’ is placing their bets before a major market move. What if you could spot signs of a big stock movement before it happens?
Unusual options activity (UOA) is when a stock’s options contract volume is trading significantly higher than average, which is a common sign that there are large institutional investors or hedge funds at work making bets on the future price movements of those stocks. Usual options activity matters to traders because they can follow the moves of the bigger investors to efficiently navigate the options market in pursuit of profit—tracking UOA can help retail traders capitalize on institutional moves.
Our guide on unusual options activity will cover the key strategies, tools, and risk considerations that any investors should know about before making the same moves the institutional traders are making like contrarian trades or earnings/events-based trading moves.
What Is Unusual Options Activity (UOA)?
Unusual options activity, or “UOA,” is when a stock’s options contracts volume is significantly higher than its average. UOA can commonly signal that large investors are making bets on the stock’s future price such as hedge funds or large institutional investors. Unusual options activity is triggered when a few of these traders make large transactions in a single day, usually occurring around major news or other notable events such as changes in investor sentiment, earnings reports, or new product releases.
There are plenty of things that unusual options activity can be communicating to investors and traders. It can provide early clues about potential price movements, and the large volume of orders being placed can show traders where the “smart money” is going. By sitting back and viewing where large institutional investors are placing their money, traders can gain invaluable insights on whether the potential return on a trade could meet expectations.
Key Indicators of Unusual Options Activity
Now that you’re familiar with what unusual options activity is, what does it indicate of the options market as a whole? The next section will cover the key indicators of usual options activity, the root causes for sudden or unexpected demand for certain options contracts at certain times. The more familiar you can become with these indicators, the quicker you can become with spotting opportunities for trading around UOA.
- High Volume Relative to Open Interest: When volume greatly exceeds existing open interest, it signals fresh positioning. It means that a large number of traders are happening in a market compared to the total number of open contracts. It indicates that contracts are being bought and sold quickly (fresh positioning) and can signal something good and something bad. The good news is that these conditions signal high liquidity, but the downside is that there’s a lack of strong directional market sentiment.
- Large Premium Trades: When a single trade involves millions of dollars, it suggests institutional involvement or hedge funds. This shows that these large-volume traders are making considerable bets on the future direction of the stock price, which could signal a great opportunity for smaller investors.
- Out-of-the-Money (OTM) Contracts with Large Buys: This situation is where traders are purchasing a considerable number of option contracts which are considered “out of the money.” It means that the strike price isn’t favorable compared to the current market price of the underlying asset. What this indicates is the buyer believes that the price of the underlying asset will move in the desired direction before the option expires.
- Sweeps: This refers to a sudden price movement that occurs when a large order is executed. It usually triggers pending orders, which results in rapid price swings that are useful for investors looking for the prime time to enter a new position at a low price or exit an old position, locking in as much profit as possible. Aggressive buying across multiple exchanges, often signaling urgency.
- Block Trades: These refer to large, negotiated transactions that hint at institutional strategies. They are private transactions for buying or selling securities that take place off the exchange. They’re negotiated between two parties and can be done directly or through a broker.
- Sudden Spikes in Implied Volatility (IV): When this occurs, traders can often deduce that anticipated news events or earnings surprises have been responsible for triggering such trading activity.
Tools & Resources to Track Unusual Options Activity
Check out our favorite tools and resources for tracking unusual options activity in the market and being able to capitalize on these discrepancies quickly. Traders can choose between options brokers that carry these features or even options flow services which specialize in tracking unusual options activity. You’ll even find some free public tools which can be super helpful.
Brokerage Platforms
Check to see if the online broker you’re using for trading online options comes with usual options activity trackers or tools. We know for sure that the following three brokers carry a wide range of great tools for helping traders discover what’s behind unusual options activity and taking advantage of the circumstances.
ThinkorSwim at Charles Schwab
- Sizzle Index — Highlights stocks experiencing significantly higher than average options volume.
- Flash Trade — Identify usual options activity and get real-time insights into significant option trades
Interactive Brokers
- Option Analytic Window — Visualize changes in an option’s price.
- Unusual Options Activity — Identifies contracts that are trading at a higher volume than their open interest.
- Option Market Scanners — Monitors option activity by tracking changes in open interest, implied volatility, and option volume.
- TWS Option Activity Analysis — Tracks the trading volume and option interest of options for each expiration.
- Option Chain Page — Create combination spread orders for multiple leg combos.
- TWS Option Liquidity Tool — Submit bids and offers in multiple strikes.
- Options Wizard — Identifies strategies based on the investor’s belief about volatility or price movements.
- TWS OptionTrader — Provides investors with data and tools for trading options.
Fidelity Active Trader Pro
- Usual Options Activity — Identifies options contracts with high trading volume relative to open interest.
- Signal Market Movements — Indicates new positions and potential significant shifts in the underlying asset.
- Real-Time Data — Delivers insights into volume spikes, open interest changes, and other significant anomalies.
Options Flow Services
- Unusual Whales: This financial data platform provides real-time and historical data for retail traders who are trading options, equities, or cryptocurrencies. However, the platform is best known for tracking unusual options activity for traders who want to capitalize on these trends.
- FlowAlgo: A financial data algorithm, FlowAlgo tracks and analyzes multiple stock and equity options transactions to provide retail traders with order flow data that is usually only available to industry insiders. Use FlowAlgo to gain unique insights into usual options.
- OptionStrat: A tool that helps traders analyze and visualize options strategies and scans the market for large and unusual traders. The site/app categorizes them as bullish, bearish, directional, or neutral. It also comes with an options optimizer and a profit calculator to develop the ideal strategy.
- Cheddar Flow: This platform provides real-time data on options activity in the US markets, including unusual options activity. Cheddar Flow helps investors make data-informed decisions by offering insights into buying and selling activity they track.
Free Public Tools
- Nasdaq & CBOE Option Data: Investors can also monitor data on both of these exchanges. They can spot significant spikes in trading volume for specific contracts, which could be indicating large institutional bets or insider information about a potential price movement.
- Barchart’s Unusual Options Tracker: A trading toll that helps traders identify usual spikes in options trading which can indicate significant market moves that could be profited from.
- Market Chameleon for Volume and IV Analysis: A platform used for analyzing the options market and its associated data. It’s primarily focused on implied volatility and volume trends, which lets traders find trading opportunities based on how the market prices future volatility in relation to historic levels.
How to Analyze and Interpret UOA for Trading
To effectively analyze and interpret usual options activity involves traders pinpointing specific spokes in trading volume or open interest for the options contracts in question. Other important steps are considering overall market sentiment and not enough can be said for correlating these activities with relevant events, company fundamentals, and significant news updates. Keep reading to learn, step by step, how to properly analyze and interpret unusual market activity to make the best-informed trading decisions for your portfolio.
Step 1—Confirm Unusual Activity
The first step involves confirming unusual activity and this begins with cross-checking volume and open interest. The key is to look for repeated large orders.
– Volume signifies the number of shares traded within a given period.
– Open interest reveals the number of outstanding contracts that have yet to be settled.
Comparing the data from both trading metrics helps traders gain a deeper understanding of potential trend direction and market sentiment. Volume and open interest provides insights into how much participation there is in the market and the conviction that investors are showing behind each price movement.
A good indicator of a strong trend is when high volume is paired with rising open interest. A clear trend reversal from this would be if there’s high volume but a declining open interest.
Step 2—Identify Trade Direction
Next, you’ll want to identify trade direction in the market—it’s done by analyzing the put-call ratio. Bearish sentiment can be indicated by a higher put-call ratio where more puts are being traded than calls. Bullish sentiment is evident when there is a lower put-call ratio where more calls are being traded than puts.
Two other important factors to consider are the trade execution price and the bid/ask spread:
– Trade Price Execution: This refers to the process of completing a buy or sell order on a financial market, and traders can analyze it relative to the previous price to infer the direction of the trade. “Buys” indicate upward movement, and “sells” indicate downward movement. Higher execution prices are usually a buy, while lower execution prices are a sell.
– Bid/Ask Spread: The difference between the highest price that buyers are willing to pay for an asset and the lowest price that a seller is willing to accept. Traders who are looking to sell will receive the bid price, while those looking to buy will pay the ask price.
Step 3—Consider the Broader Market Context
The final step is to take the broader market conditions into consideration. Context matters. You have to take a look at how events like earnings, news catalysts, or economic reports could be at play with the usual option activity you’re witnessing.
Sector trends are key to consider. You might be seeing downturns or upticks in cyclical or noncyclical sectors based on the current economic conditions. For instance, there could be a significant selling-off of cyclical sector options and a simultaneous buying-up of noncyclical sector options in response to a sudden economic downturn.
Strategies to Profit from Unusual Options Activity
Check out some of the best strategies and techniques for profiting from unusual activity in the options market. A lot of it comes down to copying the moves and plays of the bigger institutional traders, but there are a few other strategies that are worth taking a look at too!
Following Institutional Moves
Traders should monitor and potentially mirror the trading moves of large financial institutions like mutual funds, hedge funds, pension plans, and large financial institutions. These large investments can have a major impact on overall market trends and on the price for stocks. Following the moves of the institutional investors is an attempt to understand where the smart money is going to profit from similar trades.
Example
If large call options are bought aggressively, consider going long on the stock or buying calls.
It’s key for investors to confirm these institutional moves with price action and volume in the underlying stock. They must verify this potential trading signal by analyzing how the price of the stock is moving alongside its trading volume. The signal is strengthened when there is a considerable increase in volume accompanying the price movement. It can also indicate strong conviction from those participating in the market, namely the big institutional investors.
Contrarian Trading Approach
The contrarian approach to options trading is an interesting one and it’s denoted by traders or investors who go against the prevailing market sentiment intentionally. What this looks like is buying when most other trading is selling and selling when most others are buying. The idea behind the contrarian approach is a belief the market has moments where they are incorrect. It’s the idea that the market could be overreacting to current trends and that undervalued assets’ true worth will eventually be recognized. With this in mind, traders can enjoy some profit potential when the market sentiment shifts to align with reality.
The contrarian trading approach requires strong analysis of the market—the contrarian position isn’t taken just because it’s different but it’s rooted in genuinely undervalued assets. The entire goal is to find the assets that have been undervalued due to excessive pessimism or the assets that have been overvalued due to excessive optimism.
Institutions recognize the contrarian trading approach that option trades can be used sometimes as hedges against a stock price directional bets. A perfect example of this would be when a stock is trending up but put activity is high. Anyone with a keen eye for trading might recognize this as smart money hedging rather than outright bearish bets. The smart money in question, no doubt, comes from these contrarian traders.
Earnings & Event-Based UOA Trading
Event-based or event-driven trading is an investment strategy commonly used by hedge funds to exploit price inefficiencies that might happen before or after a company event which include things like mergers and acquisitions, bankruptcies, or earnings calls. A great strategy to profit from unusual options activity is to track UOA ahead of earnings reports or major corporate announcements to find opportunities.
A great example of using earnings or event-based UOA trading is to take advantage of a surge in call buying before earnings, suggesting a bullish expectation on the part of the investors. Buying call options with a strike price that is slightly above the current market price allows for potential upside movement, and selecting an expiration date near the announcement can help traders maximize potential gains from short-term price fluctuations.
Using UOA for Swing Trades vs. Day Trades
- Swing Trading: Investors can leverage unusual option activity to anticipate multi-day/week price movements. Identifying significant spikes in options trading volume at specific strike price scan signal potentially large price movements in the underlying stock. Swing traders can position themselves ahead of any anticipated price changes. This move allows swing traders to follow smart money by watching where big institutional investors are putting their bets (through options).
- Day Trading: Watch real-time options sweeps for quick momentum plays. Often, unusual options activity strikes when one or few traders make a large options contract on a single day for a specific security, so there are opportunities for day traders to strike while the iron is hot and still be settled up by the end of the business day.
Risks & Pitfalls to Avoid
Trading based on unusual option activity isn’t always a sure thing. It comes with its own unique set of risks and pitfalls that can be avoided if you take the time to get familiar with some of this trading technique’s shortcomings.
- Not All UOA Leads to Profitable Moves: While large or unexpected option traders might signal potential market movement, it doesn’t always guarantee a profitable outcome for traders or investors. Some unusual options activity can stem from speculative trading and can ultimately become misleading. It can even stem from market manipulation or an incorrect interpretation of the underlying reasons behind the unusual trades. A prime example of this is seen with institutions hedging, rolling positions, or using options for complex strategies.
- False Signals: There are situations where large option trades are driven by hedging strategies, market manipulation tactics, or arbitrage trades. These false signals can give the indication that there’s strong conviction about the future direction of and underlying, however, these large trades don’t always mean a major move is coming.
- Over-Reliance on UOA: It’s best to confirm your theory about unusual option activity with technical and fundamental analysis of the underlying company to validate any potential trading opportunities.
- Liquidity Issues: Some option chains have low liquidity, making exits difficult. You can spot them easily—they have wider bid-ask spreads, minimum open interest, and low trading volumes. This is another situation where traders have to do good research before springing to profit from unusual options activity.
Case Studies: Real-World Examples of UOA Success
Taking a look at some real-world case studies can provide you with a better idea of how investors and traders can take advantage of unusual option activity and leverage these situations to make a profit.
Example 1: Tesla (TSLA) Pre-Earnings Call Surge
Before a Tesla earnings report, traders might see a significant increase in the buying of call options. This can be a strong signal that traders should anticipate a future price increase in the underlying stock. They can profit from this scenario by buying call options at a lower price before the breakout occurs. Once the sudden price increase occurs, traders can sell these contracts for a much higher price than they paid for them!
Example 2: SPY Put Spikes Before Market Sell-Off
In this situation, there is a sudden increase in the price of a put option on the SPDR S&P 500 ETF (SPY). The put options give the owner the right to sell their SPY stocks at a set price (strike price) regardless of how low the stock price ultimately goes. Institutions typically use UOA to hedge against a market downturn using put spikes such as these because they can still sell these stocks at the strike price of their choosing, and it doesn’t matter how low the market goes—they can still sell for the amount they’d like even if the stock price worsens.
Example 3: Meme Stocks & Retail Trader Impact on UOA
A stock that has gained popularity among retail investors, meme stocks are generally traded by young, inexperienced investors which results in these stocks being traded at prices that are above their estimated value. This results in plenty of unusual option activity especially among stocks like AMC or GME.
Something that can be learned from this type of trading is the reality that unusual activity can be triggered by investors who aren’t using the correct fundamental analysis, while trading results in stocks that aren’t ultimately priced correctly. This can result in a speculative, volatile market.
Final Thoughts—Should You Trade Based on UOA?
Unusual options activity is like a ‘cheat code’ for traders, revealing where the big money is going. But spotting it is just the first step—knowing how to act on it is where the profits are made. Tracking usual options activity can be advantageous because it allows investors to discover and mimic the moves of the bigger investors to create bigger profits. However, it’s best to diversify your strategy and to not make this your sole strategy as they aren’t always a sure thing.
Combining options flow with technical and fundamental analysis is where you want to be when attempting to trade around unusual options activity. If you’re interested in getting your feet wet with this kind of trading and you feel you could handle the technical and fundamental analysis side of things, we’d recommend starting to monitor the UOA using free tools before committing real capital. It’s also key to experiment with tracking UOA and integrating it slowly into your trading strategies.
Check out some of the trading platforms and other tools we mentioned under the “Tools and Resources” section. Sign up for brokerage tools or test UOA trackers to refine your approach toward trading around unusual options activity!
