When analyzing options flow, our focus is on sweep trades because they are a more reliable indicator in directional sentiment. We'll get to exactly why that is, but first let's summarize the key differences between blocks and sweeps.
Sweeps are crucial to retail traders because of what their presence indicates. When an Institution has directional belief in an underlying stock and wishes to position themselves in a trade as quickly as possible, they send a large options order into the market.
The term Sweep comes from the nature of these orders. Due to the large size of an institutional options trade, the order is split up into several smaller orders and swept across multiple exchanges. The institution's desire to break up the order for the quickest transaction completion is our first indication of aggressive sentiment.
Our second indication of institutional aggressiveness is the price the sweep is sent at. An order at or above the ask is considered to be aggressive because of the hit institutions take on slippage. Slippage refers to the amount of money you would lose by buying an asset and then immediately selling the asset. If an options contract has a bid-ask of $4.00 - $4.40 and the contract is purchased at the ask of $4.40, there would be a $40 slippage to turn around and get out of the position instantly.
An institution sending a sweep order of 1,000 contracts at the ask of $4.40 would have a total slippage of $40,000. When an institution sends a sweep order at or above the ask, they are sending a message to the market that the slippage is a small price to pay compared to the potential of the trade.
Where sweeps are broken up and sent across the public market, Blocks are a single transaction that's price is privately negotiated between the buyer and seller. Block trades are most commonly transactions agreed upon between an institution and the market makers based on the liquidity needs of the market.
At first glance, block orders appear to be the pinnacle of aggressive transactions. You will often notice blocks are deep ITM or very far OTM. Sometimes they are even well above the ask with millions in premium.
However, the fact these orders are privately negotiated means we can't say with confidence the intention behind the trade. Many institutions use block trades to exercise the contracts, balance a negative position, create a spread, or hedge a share position. There are too many possibilities to rely on block orders for clear directional insight like we can with sweeps.
If you're looking for the best opportunity presented by institutional options traders, scan for repeat Unusual Options Activity. Institutions sending multiple sweeps of the same sentiment over a short period of time adds an additional layer of confirmation when looking for institutional insight into the options market.
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