Unusual Options Activity refers to options flow orders with no more than 35 days until expiration and a strike price at least 7.5% OTM. These type of orders are defined as unusual because they stand out as short term volatility sentiment indicators.
When Analyzing Unusual Options Activity for directional insight into a ticker, there are 3 key factors to consider - Relative Volume, Sentiment, and Aggressiveness.
Volume is always going to be one of the most crucial factors. How much interest is there in the market to transact this commodity? The best tool at our disposal to determine the level of interest in a commodity is assessing the volume - open interest. Volume refers to the total amount of transactions on the current trading day. This metric is constantly updating from open to close. Open interest refers to the amount of contracts that exist within the market. This metric is only updated once per day before market open of the current trading day, based on the number of contracts that existed at the end of the previous trading day.
Looking now at Unusual Options Activity, the higher volume is compared to open interest, the better. This indicates above average interest in the commodity.
This particular order would be of extremely unusual interest because the volume on the day for this particular contract is 18,100 with an open interest heading into the day of only 2,507. This is much more intriguing than if the volume was only 1,000 compared to the same open interest.
This particular unusual options flow order contains another trait that we keep a close eye on (Hint: Look at the yellow text next to the ticker)
When an institution sends an order at the ask (Tagged as Bought in the TitanFlow app) or above the ask (Tagged as Bought (AA)) They’re sending a message that they are willing to purchase the contracts at the highest amount (or even more if the order is above the ask) they are currently valued in the market in order to get filled as quickly as possible. Think of bid - ask as an auction. The seller starts the auction at $400 and the current buyer is only bidding $380. Along comes an aggressive buyer who says I will pay the $400 ask, but we have to close the deal now. Why would an institution aggressively pursue an option contract to the point they are willing to pay even more than the contract is currently valued by the market? This generally indicates the institution initiating the transaction believes the contract is worth more than the market does. Institutions have vast resources at their disposal, so any sight of institutional aggressiveness should be noted by retail traders.
Beyond the transaction price initiated by the institution, we’re also keeping an eye on the amount of similar orders sent on a ticker. This is very similar to volume and open interest. A ticker that receives 2 bullish unusual options flow orders totaling $300k in premium is intriguing, but that same ticker receiving 12 bullish unusual options flow orders totaling $6M in premium is much more aggressive.
Now of course, Unusually aggressive options activity alone is never a guaranteed signal. But it is a valuable tool that we can use to confirm our trade ideas.
The sentiment of Unusual Options Activity is more of a qualitative judgement based on the culmination of everything we’ve discussed so far. For example, multiple unusual options flow orders containing abnormally high volume compared to open interest combine to give us the overall sentiment of institutions.
Another tool we use to calculate the sentiment of unusual options activity is the put - call ratio of a ticker. This tool, similar to the other indicators we have discussed, provides insight into the level of confidence institutions have.
Now that we understand the key factors to study when analyzing Unusual Options Activity, let’s walk through a real world scenario to see how everything comes together when utilizing Options Flow to identify a profitable opportunity.
I developed a swing trade idea for $AAPL based on historical earnings data research. The past 3 earnings saw a $12 - $17 run up in the 20 trading sessions leading up to earnings. I decided to sit back for the first week and analyze the options flow market to confirm institutional sentiment aligned with my idea before executing the trade.
In the first week of the 1 month trade idea the total institutional call volume on $AAPL exceeded put volume by 44%. This gave me the confirmation I was looking for.
Looking at the last 2 days of Significant Unusual Options Activity was the last layer of confirmation needed. Institutions confirmed my trade idea by aggressively targeting OTM contracts with 3 - 4 weeks until expiration at the ask. At this point every box was checked in my Unusual Options Activity analysis.
In this example I used Unusual Options Activity to validate that big money’s sentiment on a trade idea aligned with my personal sentiment, but there are several other powerful ways to utilize TitanFlow. Many traders enjoy doing it the other way around, setting alerts for Unusual Options Activity and then inspecting if there is a viable trade opportunity after. You can even use Unusual Options Activity to monitor institutional sentiment in your open positions.
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