Must-Know Investing Strategies: Analysing Unusual Options Activity

It is always helpful to add a new wrinkle to your trading arsenal. Analyzing unusual options activity on a daily basis can be very worthwhile.

Unusual option trading activity is subjective, as you are defining what you believe is unusual. After a brief explanation, I will show a stock that displays some unusual options trading activity, and how you might evaluate this activity for a trade.

Start with identifying volume spikes

Calculating unusual trading activity can be simple or complex.
In general, if today’s volume is larger than yesterday’s volume by some percentage, that could be considered unusual options trading activity.

Additionally, you want to make sure that the volume today is greater than the open interest from the prior day. This tells you that the trade is a new trade.
Must-Know Investing Strategies: Analysing Unusual Options Activity
Image by /
If the volume today is less than the volume the day prior you do not know if someone is unwinding a position, or is putting on a new trade.

I like to see volume that is between 200-400% larger than the prior day’s volume, where the volume today is greater than the open interest the prior day. This is a criteria for unusual activity. Once I find stocks that display unusual activity, I analyze the activity to evaluate if the trade is likely a directional bet or a volatility bet.

For example, if someone just buys a call, then their strategy is likely a directional bet where the investor believes a stock or ETF is going to move higher. If on the other hand they actually bought a call and a put at the same strike price, their strategy is called a straddle, where the investor thinks the market is just going to move one way or the other.

The best way to check this is to also evaluate the unusual activity for both call and put options.

For example, on Monday October 10, during the morning hours, Petroleo Brasileiro SA Petrobras (PBR) displayed some unusual trading activity as the PBR November 4, 11 Calls had volume that was more than 300% its prior day volume. The volume was also greater than the prior day’s open interest.

Your next step is to evaluate a chart of the stock and any news that has come out about the stock. The stock price is breaking out and testing the 200-week moving average.  The next level of target resistance is the September 2015 highs near $21.

Oil prices are on the move higher, and using options to take a position in PBR sounds interesting.

By evaluating unusual options activity, you can find stocks or ETF’s that are on the move. This technique provides you with a tool that can alert you of trades and potentially kick start your analysis of a company or sector.
Published on Oct 10, 2016
By David Becker

Copyrighted 2016. Content published with author's permission.

Posted in ...