![]() ![]() They’re the hedge funds, proprietary trading firms, institutional banks, and billionaires that set the tone for the rest of the market. ![]() Smart Money is the group of key players that control the market, accounting for over 70% of total trade volume. More commonly, bullish unusual options activity typically originates from “smart money” making huge leveraged bets on short-term market direction, either before a catalyst event or from inside sources. That’s why we recommend trading bullish Unusual Options Activity on individual tickers (not ETFs) - to greatly eliminate the possibility that the trade was executed as a hedge. Typically, institutional investors trade bullish options on individual tickers to build positions.Īnd to limit their exposure to an overall market downturn, they also trade bearish options on ETF tickers like SPY as hedges. While it’s certainly possible that institutions are hedging short positions with bullish options trades, it’s much more common to see bearish options trades used as hedges against the downside. ![]() The same logic applies to hedges against known or unexpected catalysts.Īn institution may choose to use an option to hedge against the short-term volatility that will likely follow the catalyst event if they still maintain the same long-term sentiment and don’t want to sell to avoid short-term volatility. In this scenario, institutions trade bearish options if they have a long position in the underlying equity or bullish options if they have a short position in the underlying equity. Instead of selling that equity position with possible tax implications, they use options as hedges to limit their exposure to short-term volatility. Let’s start with why we may see Unusual Options Activity that’s really a hedge on an equity position.Īn institution may have a large equity position (long or short) in an individual ticker. An activist investor taking a new position in a company.Influential analyst upgrades or downgrades the stock.A highly leveraged bet or hedge before unexpected catalyst events.A highly leveraged bet or hedge before known catalyst events.A highly leveraged bet on insider information smart money used its unfair advantage to receive legally.Primary drivers of Unusual Options Activity: What makes Unusual Options Activity such a powerful leading indicator of upcoming market movements are the main drivers of why we typically see this unusual activity. The answer is simple: these trades give us high-potential trade ideas if identified correctly. So why do we care about these unusual options trades? This indicates a new or “fresh” position.The strike is very far from the spot rate, implying an expectation of a large movement.This implies an expectation of a quick movement happening before the expiration date.Up to 5-10 times more than the daily average.Large spike in options volume compared to the daily average In other words, a large concentration in a single contract. ![]() Single options contract with large volume compared to the average contract size There’s no single definition for Unusual Options Activity, but below are a few key characteristics that have proven to be indicative of large upcoming movements: What kind of anomalies are considered Unusual Options Activity? We call these anomalies Unusual Options Activity, and oftentimes, this unusual activity serves as a leading indicator ahead of a large movement in the underlying stock. However, in those millions of trades, there are always a few “unusual” options trades that don’t seem to make sense under normal circumstances. Millions of options contracts are traded each day, but most of them aren’t very interesting. the 6M+ options contracts traded on a daily basis). Put simply, Unusual Options Activity (UOA) represents anomalies in the Options Order Flow (i.e. ![]()
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