Unusual options activity simply means there is an abnormal amount of trading activity in a particular option. It doesn’t necessarily mean the stock will go up or down, but it can be an indicator for various strategies.
There are a few things you can look for to spot unusual options activity:
- Abnormally high options volume
- Abnormally large options trades
- Unusual put/call ratio
- Heavy buying or selling of out-of-the-money options
Unusual options activity defined
If you're an options trader, unusual options activity can signify a big move coming in the stock. It can also suggest that someone knows something that the rest of the market doesn't know. Either way, paying attention and using it as a guide for your own trading is essential.
Options activity, such as high open interest or volume, does not always mean a significant directional move in the underlying is imminent. Large options trades may be influenced by dealer positioning, position traders adjusting a long-held trade, or hedgers unwinding a part of their delta position.
To understand what unusual options activity might mean, it's important to look at the underlying stock and see what is happening with the price, company news, and the broader market.
Identifying unusual options activity
The most important thing to look for is higher than average daily options volume. Block trades are large trades typically executed by institutions or professional traders. These trades can be easily spotted on an options chain.
High volume can be a sign that something big is about to happen. You can also look for abnormally large options trades, an unusual put/call ratio, and heavy buying or selling in out-of-the-money options.
Using unusual options activity in your trading
The best way to use options activity as a tool is to watch for it in the stocks you follow. However, it may be challenging to determine if unusual options activity results from option selling or buying.
For example, an aggressive buyer purchasing a large block of out-of-the-money call options has a very different bias than a bearish seller of out-of-the-money call options.
The execution price of the trade relative to the bid-ask spread is also important information. A large volume of contracts purchased at the ask price signifies aggressive buying. A large volume of contracts sold at the bid price is a sign of aggressive selling.
In general, unusual options activity is a good thing to be aware of as a trader. It can signify that something big is about to happen, and it's important to pay attention to the underlying price action to see if the trade is worth taking.