Unusual Options Activity
Unusual Options Activity
Regardless of whether you're a retail investor who wants to look past the confines of the relatively safer turfs of your regular stocks, bonds and mutual funds portfolio and cross-over towards the much more speculative and fun, although riskier market of options trading, or if you're the market analyst of a big, multi-national company looking to hedge the cost of your primary resources, it is usually to your advantage if you turn out to be as well-informed as possible prior to determining whether you are going to take that plunge to the high-reward but also high-risk environment of the options trading market.

The oracle of Omaha, Warren Buffet, refers to options as ‘financial weapons of mass destruction’. While it’s true that the options market isn't meant for everybody, for that well-seasoned trader nevertheless, it offers advantages and safety outside the capabilities of other much more conventional securities being offered in the market.

Having access to readily obtainable information from the internet, it really has become so simple now for one to gain a hold of several applications, resources, charts, graphs along with other information associated with options trading. Do not be lulled into considering that this really is all you have to perform however, because in order for you to obtain the best outcomes you should still be able to have technical and fundamental analyses, together with an awareness of the pertinent developments regarding the fundamental asset, like scheduled announcement of earnings, FDA meetings, purchaser conferences, mergers, takeovers, approaching dividend ex-dates, among others.

But when you are new to the business and faced with a seemingly endless parade of organizations, ticker updates, profiles and interviews, as well as being harassed with all sorts of real-time as well as archived info, it will be understandable in case you stop to ask your self: exactly where, do I begin amidst all of this overwhelming information?

Well, it would be a great idea to start out with the few identified options that are presently generating all of the chatter and movement within the market. Those select few issues which, for reasons still beyond your grasp, are behaving so far out of their normal performances that there’s nothing left to do but to speculate that there must be something really important brewing from within. And you must get to the bottom of it. Make no mistake, they are absolutely out there. It’s just that they are not as easy to spot to the untrained eye.  

So, is there a method to the madness? How do you look for unusual options activity?

Following are some pointers to guide you if you want to stumble upon a potential gold mine:

Options Volume

Your curiosity should be piqued when a particular company is suddenly trading to at least three times of its regular average daily volume in terms of calls, puts, and open interest, especially if the attention is directed only towards the shorter-term options and a couple, or even a single strike price only.

Keep track of large blocks of contracts changing hands and note the time they had been traded because this usually indicates that institutional investors are involved and not just the normal run-of-the-mill retail investors. These big boys represent “smart money” because they usually have access to certain information which the rest of the market may still be oblivious to as of the moment. You can follow the “smart money” as soon as you're able to confirm that the transactions are not part of a spread trade, a rollover, or some other complicated trading mechanism (which more often than not, usually just means that there’s really nothing much extraordinary happening).

Implied Volatility

Unlike stocks which has a clearly defined number of shares, options possess a virtually unlimited supply. But if buyers are prepared to shell out additional 10 or 20 cents premium for a $1 item despite the fact that there seem to be nothing extraordinary happening on the surface level as far as your underlying security is concerned, then that suggests that there is a higher demand than willingness to sell for this specific contract. You should investigate quickly why the market is behaving as such, and then quickly make your move once you confirmed the cause for all this activity.

Pending News, FDA Occasions Or Upcoming Catalyst

In spite of every obtainable software program, resources, charts and graphs at our disposal, they will still  not be 100% dependable when it comes to accurately predicting the price movements of options contracts. The reason for this is very basic, when it comes down to it, the market is still ran and controlled by human beings who, by all accounts, are extremely emotional creatures. Which actually makes up for a lot of erratic, unexplained and knee-jerk behaviors that the market exhibits from time to time.

So be technically sound and fundamentally adept, but at the same time be very vigilant in looking for significant information, events and developments regarding the fundamental security such as mergers, takeovers, new management, earnings report, and so forth. These can possibly stir up sentiments which could have a ripple effect on the perceived value of your underlying security. Before you know it, you might be caught by surprise when a snowball suddenly forms out of nowhere and takes the market completely for a ride.

Look Over The Shoulder Of Experts

Finally, modern day technology, most particularly the internet, has made it really convenient for us to gain access to vast quantities of helpful resources and information which can trick any wide-eyed investor or trader into believing that he can tread the waters on his own, armed with just these collection of resources and information in hand. Be warned however, there is definitely much more than meets the eye when it comes to securities trading, especially when you’re dealing with complex derivatives such as options. In case you're betting more than your risk-capital, then you could face a very real prospect of possibly losing that home or even that shirt on your back.

Oftentimes, it is a lot more advantageous for you to just let the experts deal with the more tedious and complicated stuff, like how to scan the market for unusual options activity, so you can just reap the rewards of much better trade decisions stemming from competently analyzed and well-researched information. There are some select websites that can provide you with tips, tactics, strategies, as well as trainings for better and more profitable trades.

Now that you understand unusual options activity, I invite you to watch my free options trading videos.

First Post! 08/27/2010
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Unusual Options Activity