Specifically, large individual orders that result in volume spikes where trading activity surges to multiples of the daily average. What Do Unusual Options Traders Look For?Īs with much else in trading, it all starts with volume. Options are ideal for institutional players wanting to express a short-term directional view without trading the underlying market. Second, in options trading, a little money goes a long way. All activity is in plain sight if you know what to look for. Unlike equity markets, there are no dark pools in options trading. The first reason that options markets are regarded as suitable for this kind of analysis is that they’re transparent.

Over the years, it’s been disseminated through online courses and webinars, to the point where it has now filtered all the way down to retail traders. It started out as the accumulated insights and experiments of options pit traders, who spent many years observing institutional activity while attempting to profit from it. This school of trading can be seen as part science, part art.

The specific underlying assets that are setting up for a move, and ii. Institutional players are considered to have an informational edge in markets, so observing the traces they leave behind is useful when attempting to discern: i. *This post has been updated from an original version, published in 2017.Unusual Options Trading is the practice of searching options markets for clues as to what the “smart money” is doing.

However, year after year, my Cabot Options Trader portfolios have soundly outperformed the S&P 500 using this strategy to help find the next hot stocks.ĭo you watch unusual options activities? Has it changed how you invest? Will following hedge funds and institutions into similar trades work 100% of the time? Without question, the answer is no. And because we bought call options, we also participated in this stock move, locking in a profit of 365% in just six months’ time. These large call buys by the trader turned out to be well-timed as GM went on a meteoric run from 30 to as high as 65. That being said, we may be transitioning into a GM/KO/DOW type of market, which makes this call buy a great risk/reward opportunity. Please note, GM is unlikely to rally $20 in the blink of an eye like stocks such as Peloton (PTON) or JD.com (JD). The most you can lose on this trade is the premium paid, or $470 per call purchased. This also follows several big buys of longer-dated calls in the last two weeks, and because the price of GM options are so inexpensive, I am going to add the stock to the portfolio today. Here are those trades:īuyer of 2,000 October 31 Call for $1.62 – Stock at 30.15īuyer of 11,000 September 31 Calls for $1.12 – Stock at 30.5

And one of those cyclicals that is performing well today is General Motors (GM) which is also attracting call buying. The market is having another wild day of rotation as super-hot growth stocks are getting hit hard, while cyclicals are rallying.

Repeated bullish activity day after day.Īn Example of Following Unusual Options Activity Straight to the Moneyįor example, in 2020 when the call buying in GM hit all three of these signals, I sent the following trade alert to my Cabot Options Trader subscribers:īuy General Motors (GM) March 31 Calls (exp.

Large amounts of money put at risk by the call buyer.

Big call buying in comparison to normal trading volume.

When examining unusual options activity (specifically call buying), I am looking for these signals: And while it’s not fair that these hedge funds may have insider information, there is nothing wrong with me following them into trades. Whenever I have big scores in the options market, they’re all found via unusual options activity.įollowing hedge funds, institutions and big traders into similar options trades has been my most successful strategy for my 20 years trading options.

Using unusual options activity