How to Trade Unusual Options Activity Using InsiderFinance

by InsiderFinance Team on 09/29/2022

What is Unusual Options Activity

Put simply, Unusual Options Activity (UOA) represents anomalies in the Options Order Flow (i.e. the 6M+ options contracts traded on a daily basis). 

Millions of options contracts are traded each day, but most of them aren’t very interesting.

However, in those millions of trades, there are always a few “unusual” options trades that don’t seem to make sense under normal circumstances.

We call these anomalies Unusual Options Activity, and oftentimes, this unusual activity serves as a leading indicator ahead of a large movement in the underlying stock.

What kind of anomalies are considered Unusual Options Activity?

There’s no single definition for Unusual Options Activity, but below are a few key characteristics that have proven to be indicative of large upcoming movements:

Single options contract with large volume compared to the average contract size

  • In other words, a large concentration in a single contract

Large spike in options volume compared to the daily average

  • Up to 5-10 times more than the daily average

Short expiration time frame

  • This implies an expectation of a quick movement happening before the expiration date

Far out of the money

  • The strike is very far from the spot rate, implying an expectation of a large movement

Large increase in open interest

  • This indicates a new or “fresh” position

Why Trade Unusual Options Activity

So why do we care about these unusual options trades?

The answer is simple: these trades give us high-potential trade ideas if identified correctly. 

What makes Unusual Options Activity such a powerful leading indicator of upcoming market movements are the main drivers of why we typically see this unusual activity.

Primary drivers of Unusual Options Activity:

  • A highly leveraged bet on insider information smart money used its unfair advantage to receive legally
  • A highly leveraged bet or hedge before known catalyst events
  • A highly leveraged bet or hedge before unexpected catalyst events
  • A hedge on equity positions

Examples of known catalyst events:

  • Earnings reports
  • Dividend announcements
  • Product launches

Examples of unexpected catalyst events:

  • Influential analyst upgrades or downgrades the stock
  • Black swan event
  • New short seller report released
  • An activist investor taking a new position in a company
  • Unexpected CEO announcement

Let’s start with why we may see Unusual Options Activity that’s really a hedge on an equity position.

An institution may have a large equity position (long or short) in an individual ticker.

Instead of selling that equity position with possible tax implications, they use options as hedges to limit their exposure to short-term volatility. 

In this scenario, institutions trade bearish options if they have a long position in the underlying equity or bullish options if they have a short position in the underlying equity.

The same logic applies to hedges against known or unexpected catalysts.

An institution may choose to use an option to hedge against the short-term volatility that will likely follow the catalyst event if they still maintain the same long-term sentiment and don’t want to sell to avoid short-term volatility.

While it’s certainly possible that institutions are hedging short positions with bullish options trades, it’s much more common to see bearish options trades used as hedges against the downside. 

Typically, institutional investors trade bullish options on individual tickers to build positions.

And to limit their exposure to an overall market downturn, they also trade bearish options on ETF tickers like SPY as hedges. 

That’s why we recommend trading bullish Unusual Options Activity on individual tickers (not ETFs) - to greatly eliminate the possibility that the trade was executed as a hedge.

More commonly, bullish unusual options activity typically originates from “smart money” making huge leveraged bets on short-term market direction, either before a catalyst event or from inside sources.

Smart Money is the group of key players that control the market, accounting for over 70% of total trade volume.

They’re the hedge funds, proprietary trading firms, institutional banks, and billionaires that set the tone for the rest of the market.

This group of Wall Street insiders uses their considerable resources to legally identify market-moving information before the rest of us, giving them a significant information advantage over the average investor (you and me).  

Because their information advantage makes it much harder for them to lose, they can confidently take large positions in highly-leveraged options trades and multiply their profits. 

This is where having the right tools can make all the difference.

Identifying these large positions made with high conviction gives investors like you and me the same advantage as smart money without spending millions on the same massive resources. 

That’s where InsiderFinance comes in.

We figured out how to expose the high-probability Unusual Options Activity that smart money is confidently trading to multiply their profits so you can trade alongside smart money into the hottest unusual options trades on Wall Street.

How to Identify Unusual Options Activity

So how can you find these high-potential anomalies in the options order flow?

It all starts with the data.

Because there’s not a single definition for Unusual Options Activity, it’s not straightforward (unless you’re using a cutting edge order flow platform like InsiderFinance). 

Most platforms that claim to show Unusual Options Activity all source their data from the same data source with mixed results.

A rare few like InsiderFinance have a proprietary method of identifying unusual activity with a track record of strong results.

Underpinning the InsiderFinance platform is a proprietary algorithm that intelligently processes and filters the options order flow and dark pool prints to increase your probability of success. 

Unlike other options order flow tools that use the same cookie-cutter data source and basic filtering, InsiderFinance starts with the raw feed (i.e. 6M+ options contracts traded on a daily basis) and uses proprietary processing and filtering, developed by a trained Wall Street quant, to only show you the unusual options activity that has the potential to be market-moving.

Our advanced algorithm does all the heavy lifting behind the scenes to identify high-probability Unusual Options Activity, and our dashboard brings the highest-potential trades front and center!

Top Tickers

InsiderFinance has multiple categories of unusual activity Top Tickers on both the Flow Dashboard and the dedicated Top Tickers Page. 

Flow Dashboard
  • Unusual Out of the Money (OTM)
  • Unusual Volume
  • Unusual Premium

Top Tickers Page
  • Unusual Out of the Money (OTM)

The Top Tickers page features different tickers than the Flow Dashboard.

The main difference is that any ticker on the Top Tickers page has high OTM% and strong “agreement” on the trade direction. 

These signal categories fit different trading styles and different trade performances.

In our experience, Unusual trades tend to move the “slowest” (1-3 days to play out), which gives you more time to find an optimal entry. 

Many members have had success adding their favorite top tickers to the watchlist and waiting to enter the trade when they show strong technical indicators.

We recommend using the technical analysis tools included with your subscription.

You can even set custom alerts for any ticker on any time frame!

Actionable Preset

Choose the Unusual Actionable Preset to filter the entire dashboard for Unusual Options Activity with 1 click - no more digging through distracting order flow!

Smart Market Insight by Ticker

Institutional-grade order flow context, aggregated by ticker, helps you see the big picture so you can quickly find high-potential tickers with Unusual Options Activity.

Sort by any column to bring the tickers that fit your trade style front and center, or use the Command Center to tailor the filters even further.

To see tickers with high conviction, we recommend filtering by Ticker Flow to see stocks with close to 100% bullish or bearish flows.

Tickers with close to 100% bullish or bearish flows mean smart money agrees on whether they think the price will go up or down.

Real-time Options Flow

Using the Unusual Actionable Preset or filtering for Unusual in the Command Center filters the real-time order flow for Unusual Options Activity.

A powerful approach is sorting by Heat Score to bring high-potential trades front and center.

This can be a great way to discover trade ideas.

For example, the top three trades with a high Heat Score in the table below are on the ticker RLX.

How to Trade Unusual Options Activity

Our 3 Steps to Trade article captures the typical routine we go through to spot good candidates for any trading style.

In general, the more data points that support a trade idea, the higher the probability of success. 

For Unusual Options Activity, we like bullish trades on individual tickers with the most support behind them:

Repeated calls and close to 0% put flow 

  • Close to 0% put flow means that Wall Street is in agreement that the price will rise

Recent dark pool activity

  • Green highlights or gold boxes are ideal

Strong technicals

  • 4-point confirmation on the 1-hour chart and ideally also the 4-hour chart

Positive news sentiment

  • Mostly positive sentiment and no major red flags in recent headlines

Bullish sector activity

  • Bullish sector sentiment helps you avoid trading “against the current”

High Heat Scores

  • Trades were made with high conviction

Finding a trade idea using the Top Tickers

One of our favorite strategies for trading Unusual Options Activity is picking them straight from the Top Tickers page, which displays algorithmically-curated trade ideas in real time. It’s that easy!

That doesn’t mean you can trade blindly though.

Many members have had success adding their favorite top tickers to the watchlist and waiting to enter the trade when they show strong technical indicators. 

We recommend using the technical analysis tools included with your subscription.

You can even set custom alerts for any ticker on any time frame.

We recommend the 1-hour and 4-hour charts for Unusual Options Activity.

Here’s an example of the process we use. First, we find PROG on the Top Tickers page. 

Why do we like it? We see repeated call activity and a trade with a high heat score.

We can’t trade blindly on that though. The next step is validating the trade idea with technical analysis.

Validating the trade idea

Next, let’s check the technicals using the InsiderFinance automated technical analysis tools and set an alert if we don’t like them quite yet.

Notice that the initial bullish flow with a high heat score came in on 11/11 around 10am, but we didn’t receive a Long Signal alert on the 1-hour chart until 11/12 at 12:30pm.

This is what we mean when we say that Unusual Options Activity can take 1-3 days to play out. 

You can see the Trend Reversal Diamond and Trend Confirmation Diamond very close to the Buy Signal.

A few bars later, we see a buy signal on the InsiderFinance Squeeze Indicator and InsiderFinance Momentum Indicator.

At this point, assuming we don’t see any huge red flags on the Ticker Research page, we can consider trading, but you should always set a stop-loss.

Let’s check the 4-hour chart for the “long-term” trend.

We don’t see a buy signal on the 4-hour chart until 11/15 at 9:30am, but we see a very strong buy signal reinforced by a Trend Reversal Diamond and Trend Confirmation Triangle.

If we didn’t enter the position before now, the long-term and short-term technicals are pretty compelling.

So what happened?

To recap, we spotted PROG as a Top Ticker on 11/11 and received our first alert for a buy signal on the 1-hour chart on 11/12 at 12:30pm when PROG was trading below $3.

At the peak around 3 trading days later, PROG was trading over $6 for a 100% increase on the underlying ticker! 

Since we traded the same options contract as smart money, we had a 400%+ profit in just 3 trading days from the Unusual Options Activity on PROG!

Finding a trade idea in the Flow Dashboard

To identify high-potential tickers with unusual options activity, let’s start by setting up the filters to find Unusual trades with 95%+ Ticker Flow.

Tickers with close to 100% bullish or bearish flows mean smart money agrees on whether they think the price will go up or down. 

By using this filter, we’ll only be looking at tickers where institutional traders are in agreement on short-term price action, which increases our chances of success.

After we apply the filters, below is what the Top Tickers graph and Smart Market Insight by Ticker table look like when sorted by Unusual Volume.

We typically check the table and graphs for Unusual OTM %, Unusual Volume, and Unusual Premium when looking for good candidates.

As you’re deciding on which tickers to research, you can narrow down the list by looking at the sector sentiment graphs and flows with high Heat Scores.

Sectors with the highest OTM % and overwhelmingly bullish or bearish premium flow are where Wall Street expects the biggest price movements with the most “consensus”.

Combined, these two graphs help you avoid trading “against the current”.

All ships rise with the tide, so it can be easier to trade a bullish position in a sector with almost all bullish flow. 

In the graph below, you can see that the Industrials sector has bearish sentiment, and all other sectors have bullish sentiment.

Based on the sector sentiment, we’d avoid Industrials but look for tickers in Technology (where the most premium is flowing) to increases our chances of success.

Validating the trade idea

After looking at a few different tickers with unusual options activity, SQ looks the most promising because the technology sector had bullish premium flow and high OTM %.

We also saw a Golden Sweep with a very high heat score, which is pretty compelling on its own.

The next step is to walk through why SQ stood out as a potential winner.

The first thing we look for is bullish options flow, dark pool activity, and breakout signals.

Because we filtered for tickers with 95%+ ticker flow, we already know we’ll see bullish option flow for the current trading day.

The question is how bullish are the flows and do the dark pool prints tell the same story.

Two Golden Sweeps in two days for a ticker like SQ is very rare to see. That on its own is a huge bullish sign.

We also see multiple unusual contracts with high Heat Scores over the past two days. 

Looking at the week holistically, the story we see is that Wall Street had mixed sentiment towards the beginning of the week.

But as time went on, the flows became more and more bullish, with no bearish flows at all the current trading day.

Given earnings are planned to be released the following day, it seems like smart money is finding out more as the week goes on and building big bullish positions.

After considering all those factors, we can conclude that the options flow seems very bullish. 

Next, we want to check dark pool activity. There seem to be quite a few dark pool prints that have come through in the last weeks also, which is another bullish sign.

Finally, we want to check breakout signals.

We see the last breakout signal generated was a buy signal, supporting our bullish thesis.

Both the options flow and dark pool are showing promising bullish activity supported by a bullish breakout signal, but we still need to analyze technical strength and news sentiment to confirm the bullish intent (and our entry).

SQ has limited negative news sentiment and no alarming headlines that could be red flags, so we can still move forward with our analysis.

If we saw a lot of negative sentiment or questionable headlines, that could be enough to move on to another ticker.

Next, let’s look at technical analysis. We tend to look at the 1 hour and 4-hour chart when trading options to get the "short term" and "long term" perspectives.

We find that a lot of unusual options trades also have strong technicals on the 1-hour chart, so that seems to be the time frame many institutions use to trade.

The 1-hour chart above seems to have pretty strong technicals.

The Algo is in a buy trend, and both the Momentum and Squeeze indicators are showing buy signals as well. 

Let’s see if the Technical Analysis widget agrees.

The Technical Analysis widget seems to agree with our charting tools, so we can conclude SQ has a pretty solid technical setup for the “short-term” outlook. 

Let's see if we see the same on the 4-hour chart. 

On the 4 hour chart, it seems like the Algo just changed to buy with a swing diamond, which is pretty strong confirmation on the InsiderFinance Algo. 

We would ideally like to see a buy signal on both the InsiderFinance Squeeze and InsiderFinance Momentum, but given all the other data points. confirming our bullish thesis, that might be enough. 

Let’s see if the consensus on the widget agrees.

The Technical Analysis widget seems to agree with our charting tools, so we can conclude SQ has a pretty solid technical setup for its “long-term” outlook. 

All the data points combined are enough to interpret that the ticker is bullish with institutions placing a highly leveraged bet on a positive earnings surprise.

This one seems worth entering, but we should definitely enter with a stop-loss, especially if we’re trading through earnings, which we typically don’t recommend.

There's always an element of unpredictability in the markets, so it's never a guarantee to play out no matter how bullish it looks.

That's where stop losses are key.

One last piece of advice we find very helpful when picking a contract is looking at implied volatility.

For very short-term positions like day trading, it's incredibly important as you're really just trading time value.

If implied volatility is too high, the contract will have a much harder time gaining value as there's very little "upside" left.

Implied vol is the main driver of intraday value and tends to "cap" at a certain level.

So if the implied vol is already close to that level, it doesn't have much room to go up.

This trade was obviously in the past, so what happened?

The ticker continued a bull trend over the next 3 trading days with a roughly 50% gain!

When trading options, a 50% gain can be multiplied to potentially 500%+ returns. 

After these examples, you’re ready to start trading the power of Unusual Options Activity

Remember to set stop-losses and start with small amounts/paper trading, especially if this is your first time trading unusual options activity.

More Resources to Increase Your Returns Using InsiderFinance

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