How to Use Unusual Options Activity in Day Trading

What are options in simple terms?

The options trading industry is a vast one, especially in the United States. A good options trading definition is one that allows you to buy or sell a financial security at a predetermined period in time at a certain price.

It gives you a right but not an obligation to buy or sell the asset.

Data in the options market is provided freely by many online platforms like Barcharts and Webull. As a result, it is possible to see how large and small investors are positioning themselves for the future.

As such, unusual options activity is the process where you study activities in the options market and see some unusual activity.

For example, if the stock is trading at $10, you could identify a large call option in the next three months. This means that there is a large trader or investor who expects the stock to rise during this period. This also works very well with the various commodities.

Put and call definitions

To understand the unusual options activity, it is important that you know what a call and put option are. That’s because the two are the main order types in the options market.

A call option gives you a right, but not an obligation, to buy a stock at a predetermined level in a certain period. For example, if the stock is trading at $10, you could have a call option that buys it when it rises to $14.

A put option, on the other hand, gives you a right but not an obligation to short a stock at a certain point. It is the exact opposite of a call option. For example, if the stock is trading at $10, you could place a put option at $8.

To trade options in the United States, you just need to find an online broker that offers the service. Among the best-known brokers that offer these options are Robinhood, Interactive Brokers, TD Ameritrade, and Schwab, among others.

What is an unusual options activity?

The activity in the options market is important because many insiders, investors, and investment bankers use options. Therefore, looking at this data carefully can give you more details about whether to buy or short a stock.

For example, many insiders usually know whether the company is doing well or not. They have information that many other investors don’t have. For example, recently, when the Wirecard crisis came out, many senior executives knew more about the fraud the company was carrying out.

Therefore, many started selling their stocks.

Another perfect example is what happened on September 9, 2001, when terrorists hit New York. Shortly after that, shares of all airline stocks declined sharply. A closer look at the data showed that there were some investors who had previously shorted these stocks, meaning they know what will happen.

Therefore, looking at this unusual activity can help you find trading opportunities.

The unusual options activity dashboard

As a trader, the best place to start when you want to incorporate unusual options activity is to find this data. One of the best websites to do that is barchart.com. The chart below shows how the unusual options activity dashboard looks like.

In this table, we can see some of the top companies with unusual options activity. There are several key parts in the table:

  • Symbol - This shows the company. For example, WFC is the symbol for Wells Fargo while UBER is the ticker for Uber.
  • Price - This is the current share price of the stock.
  • Type - This is the type of the option. It can be a call or put option.
  • Strike - This is the price where the holder of the option can buy or sell the stock.
  • Expiration date - This is when the call or put option will expire while DTE is the number of days for the order to expire.
  • Bid - This is the bid price of a stock while the midpoint is the middle point of the bid and ask price.
  • Volume and open interest - The volume is the number of shares in the options contract while open interest is the number of options that have been traded but not exercised
  • Vol/OI - This is the ratio of the volume and the open interest.

How to use the unusual options activity

The first step of trading using the unusual options activity is to find it, as we have seen above. Next, you need to dig deeper into this data. For example, in the chart above, we see that there is some unusual activity in Wells Fargo.

With the stock trading at $33, traders have bought put options for the stock at $35 that will expire on 04/16/21 (this article is being written on 14/02/21). The volume of this 65,300, meaning that the option traders are relatively convinced. Also, the open interest is at 1,567.

As shown below, this 35 is both an important psychological level and an important resistance level, as shown in the chart below.

WFC stock

Another good example of this is Monster Beverages (MNST). As shown, the stock is trading at $91.73 and has a call option with a strike price at $95 that will expire on June 18. As you can see below, this is not an arbitrary number.

Instead, it is an important resistance level where the stock has struggled to move above before.

Monster Beverages stock

Final thoughts

The options industry is a large one. In fact, while most brokers are offering free stock trades, they have not lowered the fees they charge for their options contracts. Using the data in the options market can give you more insights about stocks and how investors predict they will move in the future.

External Useful Resources

  • Understanding Snap's Unusual Options Activity - Benzinga

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