How to Confirm Trade Setups with Options Flow - $TSLA

$TSLA Daily chart during recent $357 upside rally

Tesla presented traders with an incredible trade opportunity during a 38% upside rally from 3/15/22 - 3/29/22. Even catching just a small part of the move would have resulted in substantial profits. Through options flow and technical analysis we will be analyzing where the best opportunities were to get in on the action during this uptrend. Learning how to identify high probability trade setups will allow us to confidently position ourselves the next time we see a similar opportunity.

$TSLA Daily chart with 20 day SMA (Green), 50 day SMA (Purple), 100 day SMA (Red), & 200 day SMA (Orange)

While you could have taken a stab at entering $TSLA from $757 - $908, the most confident potential entry took place when the 100 day SMA was reclaimed on March 21st. We can say this with confidence because the 100 day SMA was a level buyers had failed to reclaim on 4 attempts dating back to January 26th. The 100 day SMA reclaim on March 21st told us that buyers were finally ready to step up and push the stock's price further to the upside.

Let's take a look at the options flow in $TSLA on March 22nd (trading session after the reclaim on March 21st) to get an idea of institutional sentiment around this significant level.

$TSLA Aggressive bullish flow on March 22nd via TitanFlow

These transactions, referred to as aggressive flow, contain several characteristics that indicate institutional conviction to the upside: Vol > OI, spot price, strike price, transaction sentiment, and repeat transactions.

Vol > OI (Volume > Open Interest) - The last order an hour before close indicates a Vol>OI of 118k>20k for the 3/25/22 $1000 calls. This means the volume on the $1000 calls for the trading session was 6 times higher than the amount of contracts that existed in the market. Volume 6 times higher than open Interest tells us there is an extraordinary amount of desire to trade this particular contract.

Spot price - The first 2 transactions that came in on the 3/25/22 $950 calls had spot prices* of 947.2 & 948.27. These spot prices confirm the notion that institutions were waiting for $TSLA to break above the previous session high of $943 before stepping in with size. This is likely the reason we did not see any aggressive flow in $TSLA until 2 hours into market open when the $943 level was finally broken.

Strike price - The OTM strikes on all transactions confirm short term volatility sentiment.

Transaction sentiment - All of the transactions were sent at the ask, indicating that it is probable these were purchases.

Repeat transactions - We also see repeat purchasing, meaning there are several orders of the same sentiment in a short period of time. This is more significant than seeing a single transaction on its own.

*Spot price - The price of the underlying stock when the the options flow transaction was initiated.

P/C ratio of $TSLA on March 21st (Left) & March 22nd (Right) via TitanFlow

Looking at $TSLA's put/call ratio for the day of reclaim and the day after confirms increased institutional conviction to the upside once the 100 day SMA reclaim was confirmed.

$TSLA 60 minute chart

Taking a look at the hourly chart on $TSLA we see that our 100 day SMA reclaim and aggressive flow were quickly followed by a $98 move to the upside over the next 1 1/2 trading sessions. The aggressive 3/25 $950 call transaction on March 22nd went from $3 OTM to $90 ITM in less than 2 days, good for over 500% profit. While opportunities this lucrative are not seen on a daily basis, the formula used to identify this opportunity is proven effective. The chart told us that institutional buyers were ready to make a big push, while the options flow market confirmed this sentiment. The combination of a quality technical analysis setup with options flow is a powerful strategy to confirm a trading thesis.

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