“Unusual Option Activity/Volume” – It can be very misleading (Breakdown)

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by AlphaGiveth

Something that has become very popular in the retail trading space is looking at the flow for “unusual” volume. Lets say the average call volume is 1,000 per day, and an order comes in for 1,500 call options, this would get flagged and thought of as a “bullish” bet.

As good traders, we should dissect this idea and determine whether or not we should actually be putting our money behind it.

Reasons to bet on unusual call volume:

– Buying a call is a bet on the stock going up.

– Buying a call is a bet on the stock going up with more volatility than the market implies.

– It “looks like” someone is betting on the stock going up, fast.

Reasons to NOT bet on unusual call volume:

– What if they bought a call April, and sold a call in May? Now their view is on forward volatility, not direction.

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– What if they bought a call on stock XYZ (which gets flagged as unusual option volume), but they also bought puts? Now their view is on volatility, not direction.

– What if they bought a call on stock XYZ (which gets flagged as unusual option volume), but they also sold calls on stock ABC? Now their view is relative value, not direction.

– What if someone is selling a call spread? It would double the volume on the call side, but its actually a BEARISH bet!

– We can’t actually derive what the VIEW someone is expressing actually is simply by seeing an “unusual” order coming in.

Here’s a funny personal story.

Last week I completely dominated the chain on a stock. I was basically the whole volume on some particular strikes/expiries.

The calls that I bought were flagged by some of the big guys on twitter as unusual option activity. It was truly my “I have made it” moment.

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But the funny part?

Everyone is looking at that trade thinking I placed a bullish bet. When in reality I was trading something completely different. I had bought puts too. I had NO view on direction.

This is a prime example of the dangers here. Following my “call flow” because it got flagged, was not following my trade, or view.

Conclusion:

Seeing an order come into the market without any idea of who it is or what their view they are expressing is dangerous. If we can’t see the whole picture, we need to be careful.. our money is on the line 🙂

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.

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