It’s no secret if you’ve been following me on any of the platforms I post on that I’m an Unusual Options Activity sort of guy.
I like to pick through large or unusual opening positions into certain names and try to assess catalysts or antagonists entering into those trades.
Sometimes, I mirror the unusual trade I saw, following that trade into the same expiry and strike.
In other cases, I try to buy “safer” options..be they more in the money or with more expiration time on them. It costs me more premium, but it also lowers my risk.
To reduce risk even lower, I might pick up the underlying equity of the stock that has been catching option buying patterns I like.
Now let us move away from my trading so we can put yours into focus.
One ‘mistake’ (and I say mistake because I’ve seen it cost people a fair set of money), is seeing an unusual options trade and then try to follow it up with
a position into that name that’s cheaper due to a more Out of The Money (OTM) strike or a shorter expiry.
Don’t do that. Please.
While it might work sometimes, when you see an order where someone is putting up $100k+ of premium into a particular contract, there’s usually
a good reason they’re doing that.
To be able to play with that sort of money on an options trade speaks for itself as to their credibility and why they took on that
With that said, don’t just take on a trade because someone put some size on it. There’s really no way to gauge any option trade’s intent unless it’s your own.
I’ve heard this referred to before as ‘fake flow’. Which is to essentially state that the order was placed to fake out other traders; to entice them into calls
when in-fact the trader is bearish on the name.
Why would an options trader hit calls at ASK on a spread if they were bearish the name?
One reason could be that they are short the equity. If you shorted $TSLA at $280 and had a feeling it might go up against you, you’d want to buy calls around the $280 strike.
That way, if you wanted to cover your short position you could do it at $280 and lose nothing beyond commission really.
You could also buy deeper ITM calls to exercise lower than your entry, which would nearly guarantee a profit once the strike you chose was under your entry price.
At this point, you should be fairly confused if you’re newer to trading options and trading them based off of unusual activity in the name.
That’s good. Veterans misinterpret options flow all the time.
The point of this little rant is actually simple: “Ordo Ab Chao” (Latin for ‘Order out of Chaos’).
The markets have been rather chaotic as of recent, but if you follow along there are still a ton of trading opportunities in every session of the market.
Chaotic/choppy markets, or markets that are once again setting new all-time highs (ATHs), can be frightful times.
Rather than copping out to fear though, these periods are what Mark Cuban once referred to as “The World Series of Investing”.
These are times to refine your strategies; especially if you’re new to trading. If you weren’t in the game before the 2008 financial crisis, you
are probably trading like the Fed’s QE programs are still underway. When buying calls and just holding them long enough was sufficient to realize
These are not those days.
Market conditions have changed a great deal since the TARP initiatives and the Federal Reserve’s QE programs.
What that means for you, the trader, is that now is the time to get more mechanical in your trading.
Don’t let trades just ‘ride out’. If you’ve secured some profit on a trade, lock some of it in before the market closes.
Overnight option positions that aren’t close to moneyness or have shorter dated expiry should be cashed out when the profit is there.
You might ‘miss’ some profits, but you won’t lose them either using this strategy.
Treat each day like a different one, as beyond earnings this week and next, there are several Geo-Political situations that can burn a position on a headline.
Bottom line, trade safer than you might otherwise. Don’t feel compelled to trade everyday. A break is nice sometimes.
Most importantly, trade safe.
I haven’t blogged in a while, get ready for more tips and content in the very near future.
Cheers and enjoy your weekend,
On this day in history, April 26th, the “Salk” Polio Vaccine Trials began in 1954. Jonas Salk, the physician who discovered the vaccine, didn’t patent it. Forbes quoted a Quora answer in 2014 that says that had it been patented, it would’ve generated Salk at least $7 billion dollars.
I found the news fitting for all the anti-vaccine headlines hitting the news recently. Also, it would be quite a different world in-terms of $XLV and our healthcare system at-large if big pharma actually cared about cures.