Big shot traders in the financial world feel a great need to gain information to attain an edge. In the stock market, when it comes to smart money and cryptocurrency, this is especially the case.
This is where unusual options trading comes in. Unusual options trading or UOT is defined as the scanning of options markets in search of clues. These clues are used to observe how well smart money is performing.
Unusual options trading gives traders an advantage in markets because they allow them to discern two main things:
- Assets that may move soon and
- Their potential direction
Unusual options trading was initially an experimental strategy built by option pit traders. Over many years, they monitored institutional activity while trying to make profits. Throughout said years, versions of it appear on the internet utilizing various courses. Nowadays, it is not only made for option pit traders but retailers as well.
Options markets are usually transparent and this makes them perfect for such scrutiny. Every activity is within viewing distance, provided you know where to search. A lack of dark pools also separate them from equity markets
Options trading also allows for larger returns on small investments. This is suitable for directional viewing over a short period, trading sans underlying market.
What to Look Out for as an Options Trader
The main thing an options trader will tend to look for is spikes in trading activity. The volume of spikes that meet the daily average is where they will focus their eyes. These spikes are caused by large orders and unusual options traders need to occur.
Of course, the nature in which they occur is important as well. If the surge in daily volume on far out-of-the-money options, traders will be keen. An increased volume coming from a single institution is also worthy of attention. This is due to the insinuation that there is prior knowledge of it.
Level of Difficulty
Unusual options trading is very difficult to maneuver. Unusual options activity traders or UOAs need to be able to screen large options positions. This will help them find and identify unusual activity that is speculative positioning-related.
Reasons to Buy Options
If an institution decides to buy a call, it is done regardless of whether or not the asset rises or falls. It is safe to say that having expectations is not particularly helpful. This makes this intriguing, but equally volatile.
Calls and puts are sold and bought similarly. This makes finding big out-of-the-money option trades difficult. The larger short-term basis ones are even more so.
Calls are usually bought to predict the possible upside. However, they may also act as a hedge opposing a short position. A hedge fund is considered overvalued if a company’s short on story stock. This can be protected against the stock surge if the stock fund buys the company’s out-of-the-money call options.
There are other reasons to consider buying options and they are:
- A possible benefit from the pre-existing short position
- Likelihood of offsetting losses from short positions
- It can offset the drawdown to its portfolio
Unusual Options Activity or UOA is the occurrence of anomalies in Options Order Flow. The UOA traders have a specific job: to sift through countless publicly traded stocks in search of options.
This is a difficult job that would be made easier if it were automatic. Several services claim to trigger UOA signals by combining the following:
- Volume vs average volume
- Volume vs open interest
- Short expirations
- Large block trades and many more
Apart from traders, other people stand to gain from options. The type of people who would benefit from this are people like stock brokers. UOA signaling services benefit such people because it prevents any oddities caused by unawareness.
UOA signaling services also help when it comes to risk management and profitability. This is the case especially for financial firms that are not related to option trading. On a domestic note, UOA services can be used by a family accountant or manager. In general, they are perfect for use when anyone wants to invest.
The importance of UOT services should be acknowledged and respected. This is especially the case in the increasingly digital financial world. Having a head start when it comes to option markets goes a long way. As they say, the early bird catches the worm.
Despite their importance, UO services need to be able to do certain things to be thought of as quality. First, it must be fully integrated into a charting platform. Secondly, it must be able to apply signals to historical data and it has to be customizable.
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