Unusual options activity can provide insight on what smart money, insiders, and big traders are doing with large volume option orders. Unusual options activity can tip a large traders hand and be a sign that a big bet has been placed for a potential move in price for the underlying stock that has a high probability. This option trading activity is usually detected due to its size and increase it causes in open interest on an option chain.
These positize sizes are generally the footprints left behind by large traders and hedge funds. The options market enables traders to make much larger bets on a price move in a specific time frame using leverage than they could with stock positions. Much less capital is needed to trade options than stocks and if the trade is right the wins will be much larger as well.
Many times this unusual option activity will be a play on a volatility event like earnings, leadership changes, news, or new product launches. Also options can be used for bets on potential takeovers, mergers, or bankruptcies. Call options are used for bullish bets and put options are used for bearish bets. It is illegal to make these trades based on information that is not publicly know.
One thing to understand about option trades is that the market is zero sum, when someone buys to open a large block of open interest for an option play understand that there is someone who sold those contracts as well, there are always two sides to every option contract trade. Someone is long and another is short every option contract so someone is taking the other side of these unusual option activity trades and have to sell them for a price to account for the risk. Of course option trades can be hedges for a stock position or can be just one leg in a larger option trade with hedges bought for these large volume option trades.
Unusual option activity doesn’t always work out as a win for the option trader and the positions can be closed out before expiration for losses or profits. The activity just shows where the biggest bets by the largest option traders are being placed on the option chain. Unusual option activity is usually defined and identified as option volume signaling new positioning that exceeds previous open interest.
Here is a link to an unusual option activity scanner: https://www.barchart.com/options/unusual-activity/stocks
I have created the Options 101 eCourse for a shortcut to learning how to trade options.
