Unusual Options Activity (Option Flow) – What It Is & How To Use It

What’s going on fellow autismo’s. If you’ve made it this far, congratulations on being part of a world-class option flow and sentiment analysis group. I (Swaggy), your host, is here to serve you. Why teach a man to fish for perch when you have someone bringing home 1,000 pound tuna on the weekly? In today’s post we are going to be going through some of the basics of using the option flow tool, how to use it, what to look for, and what the FK it all means.

I want to start by saying that this is NOT a stock-picking alert/service. I do my best to respond to almost every single DM, but I get asked way too frequently “what’s the next 10-bagger, my lord”. Simply put, I don’t FKn know and even if I did I wouldn’t tell you due to legal issues surrounding “financial advice”. If you are here to make high-risk plays to achieve 100% gains overnight then not even the great stonk lord himself can save you. If you are playing options and your position sizing is over 20% of your account per trade, mathematically the theoretical long-term estimated value of your account is $0. What does that mean? It means no matter how many wins you have, if you continue to put 20% of your account value into a single options play your account will always go to $0. Now that’s all out of the way, lets get started.

It All Starts With The Option Flow

The option flow is used to read general direction and uptick in volume, of market sentiment. In my opinion, option flow is the most un-appreciated gift in learning about market sentiment and movement. Those of you familiar with r/WallStreetBets will witness something very similar with how a stock picks up momentum, gets crazy hyped, and then either crashes with retail FOMO holding the bags or, if the stock was fundamentally strong, might go through a consolidation period. When a stock is consolidating there is typically very little “hype” surrounding it. Only once it explodes higher again that sentiment follows suit and becomes what is known as a “meme stock”. Option flow is very similar to that, except instead of being limited to only the 5 stocks that WSB talks about, the range in stocks is much much larger. In fact, it just happened these past few weeks with AMD, AAPL, and TSLA. This edge of analyzing sentiment can be incorporated into nearly any trading style.

How The Option Flow Tool Works

Our SwaggyStocks Option Flow Tool scans and classifies the option volume traded as ‘Bullish’ or ‘Bearish’ sentiment. Our proprietary algo uses last price vs the bid/ask, as well as other metrics that are logged hundreds of times throughout the day to make the best assumption on the side of the trade. For example, calls on ask would be bullish, where calls on the bid would be closer to the ‘sold’ price and thus be bearish. Same thing goes for puts being bought or sold. Though many of these trades have the potential of being ‘smart-money’ entering a large position, it is important to remember that option flow by itself is NOT stock signals to buy or sell. We, as traders/investors, are trying to uncover what’s going on with the rest of the trade. As you familiarize yourself with reading option flow, you will start to notice patterns. Are they opening a spread? Selling a covered call? Is the position tied to a collar or to shares? Synthetic long? Straddle? Strangle? Earnings YOLO with better information than others? Like I said, there are so many possibilities and what I try to do is piece the puzzle together. Don’t just look at the trade and see heavy call volume and jump it because it must be bullish.

One thing to watch and learn for yourself is to notice how stocks that are consolidating are generally pretty low in options volume. As soon as a catalyst moves the stock, option activity explodes, much like the WallStreetBets sentiment when a stock get’s “HOT”, it’s the exact same thing. Option flow can be a measure of a stock’s excitement and direction. It usually starts with smart-money building a position before the hype begins and anyone catches on. I will go into more detail on this in my next “Strategy” post, where I explain how I use option flow with my trading routine.

What if it’s a hedge?

One last thing I want to cover that I get asked a ton about, is people wondering which plays are and which plays aren’t hedges. Simply put, it doesn’t matter if it’s a directional bet or a hedge. Let’s say we KNOW the trade is a hedge, we still don’t have any idea what’s taking place behind the scenes. It’s impossible to know the full details of any trade and what other positions the player is thinking with this trade. What we can determine by using our knowledge is to make the best guess as to the direction of the bet. If a player is betting aggressively on a direction, or protecting aggressively against a position, it’s still aggressive behavior behind that move. Even if they are opening multiple long positions against a huge short position, that means they are still showing urgency to create movement in the same direction as if it were a directional bet. Opening aggressive positions in one direction will always be seen as an aggressive position regardless of external factors, period.

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