unusual options activity

Unusual Options Activity: Using volume and volatility to anticipate large moves in price

Tim Biggam Article Leave a Comment

What’s up team, Aaron here.

By no stretch of the imagination am I an expert on trading options, however…

Tim Biggam most certainly is – he’s been an options guy since 1985, originally trading on the floor of the CBOE. Thirty years on, options remain his weapon of choice, and the way I see it, that makes him the ideal candidate to write about ‘unusual options activity’.

While this topic can be a little overwhelming if you’re somewhat new to options, Tim’s done a great job of breaking it down with screenshots and a real example for you to follow along with.

It’s also worth highlighting, the software/scanning tool Tim refers to during this article is totally free and includes real time data. You can gain access to RB Technologies here, which will allow you to find similar opportunities in options markets.

Once you’ve finished reading through this article, I suggest you check out my interview with Tim from EP 016 (if you haven’t already).

Tim, take it away…

What’s ‘unusual’ options activity…

Unusual options activity (UOA) many times is a ‘tell’, a signal that there is a likelihood of a potential large move in the underlying stock. This informed activity is usually initiated by hedge funds and institutional traders. These insiders will use the options market to make very large bets to profit on the leverage that options provide. Frequently they will use the options market to pre-position in advance of an impending news announcement, such as a takeover, that may not be public knowledge.

Hedge funds are using options to a greater degree on a daily basis. Famed hedge fund manager Carl Icahn used options, not stock, to take his large positions in Netflix and Herbalife. Bill Ackman of Pershing Square, the noted adversary of Mr. Icahn, used mostly options to take a very big stake in Target Stores stock.

Options trading is at the forefront of many hedge fund strategies, and option volume is growing on an annual basis.

Tweet this

So our goal is to uncover what the big players are doing and follow along with them in the most profitable manner possible. It requires knowledge, skill and diligence, but the payoff can be enormous.

For those unfamiliar with listed options, they’re classified as either calls or puts. A call gives you the right to buy stock (usually 100 shares), while puts give you the right to sell stock. A call buyer would be taking a bullish stance, while a put buyer would be taking a bearish stance.

Discerning unusual options selling certainly has value, especially on the put side, but the focus of this article will be on uncovering unusual options buying …specifically call options buying.

Unusual options activity is first and foremost identified by the size of the trade. But you can’t just look for the biggest trades to discover the unusual aspect of unusual options activity. One has to compare it to the average size trade for that particular stock. For example, 2,000 contracts traded in an Apple option would not be considered unusual, since Apple trades 100,000 option contracts or more daily. But 2,000 contracts traded on a less liquid issue would certainly be a more meaningful event. Normally 3-4 times the normal volume would qualify as unusual.

Another screen we employ is to compare volume to open interest. Open interest represents exiting positions outstanding that still need to be closed. If the volume exceeds open interest, you know it is a new opening position, which has more informative value than a closing position.

We also look to see that the large orders move the implied volatility of options in a meaningful manner. Implied volatility is just another way of stating the price of options. So a large move in the options price, represented by an increase in implied volatility, is a more powerful trade signal than a large order that has a lesser impact.

Finally, we look to uncover if the trade took place on the offer price, meaning the buyer was aggressively willing to pay the higher price to get the trade executed. Trades executed on the offer tend to be a much more meaningful indicator.

While all this may seem to be a daunting process, there is an easier solution. I use RB Technologies option scanners to screen out potential unusual options based trade opportunities, in a much more streamlined manner. The technology they employ allows filtering for size, open interest, and trade in relation to bid/ask, plus it is available to the individual trader.

So let’s run through an example from start to finish…

On 3/10/2015, using the RB Technologies scanning tools, we uncovered a potential trade idea on Kraft Foods (KRFT), which you can see here:

unusual options activity 01

Click image to view full size.

Big Bull screens for call buys that took place on the offer, in this case 10,000 KRFT June 67.50 calls traded @ 0.70. The open interest was only 5,382, so the size was 1.86 times the open interest. This trade fits three of our criterion employed, namely large call buying which is greater than open interest and takes place on the offer. That just leaves us to do some implied volatility analysis, which we will delve into below.

The KRFT July 67.50 calls saw an enormous increase in volume, with over 15,000 contracts trading on the day versus just 41 the day before, and nearly triple the existing open interest, as seen in the option montages from 3/9/2015 and 3/10/2015 below.

unusual options activity 02

Click image to view full size.

The June 67.50 call volume of 15,609 drove the implied volatility from 18.94% to 21.84%. With the stock down 0.77, or 1.24%, the call price actually increased 0.1! Normally, one would expect the call price to drop 0.16 given the drop in the stock, but the aggressive buyer was willing to overpay to get the trade done. The June 70 and 72.5 calls popped in sympathy as well. I highlighted the comparative changes to arrive at our trading edge, seen in the table below.

unusual options activity 03

Click image to view full size.

This combination of volume and volatility many times tends portends a continuation of the upside in the stock, as the buyer of the calls is aggressively positioning in a bullish manner.

Two weeks later, on March 25th, 3G and Berkshire Hathaway announced a takeover of Kraft, causing shares of KRFT to surge to over $83 per share, a gain of 36%. All unusual options activity will not be this foretelling or profitable, but by following the big and unusual options order flow, many times we can follow along with the large hedge funds and institutions to put ourselves in a position to profit.

If you have any questions or you’re interested in further information and research, please leave a comment below or send me an e-mail [email protected].

About the Author

Tim Biggam


Tim Biggam is the Lead Options Strategist at Delta Derivatives and serial user of RB Technologies scanners.