How To Turn Information From The Options Market Into Profitable Trade Ideas! No matter if you’ve only got $1 invested in the financial markets, I still believe that every investor should be involved with options, in one way or another. Options allow you to leverage your ideas, while using less capital to achieve the same or better returns than stocks. Best of all, this can be done while reducing your overall risk in the market. Not only that, but once you get the hang of them, you’ll learn how to stack the odds in your favor, and put on trades that have a high probability of success. Of course, the beauty behind options is that they’re versatile…unlike stocks, which only leaves you with a 50/50 coin flip on trying to pick the right directional move. With options, we can create opportunities to profit if we think the underlying will not move, moves a little, moves a lot or if it’s volatility will increase/decrease.
Now, those are just some of the benefits of using options to express your view on stock (or market). However, many investors still ignore options because they are not convinced or believe that options are too confusing to learn and out of reach for them. Does it make sense to ignore them altogether? No. Absolutely Not. As you can start to imagine, the same benefits I mentioned earlier on why you should get involved with options, are some of the same reasons institutional investors and hedge funds use them. Unlike many of the talking heads on TV…these are the groups that put their money where their mouth is...risking a lot of money…to make a lot more. And you know what? I’m grateful for this…because it allows us to see what they’re doing. That’s right, unlike tracking stock activity…the options market provides insight and transparency. But how, I heard it’s just noise? My friend and one of the few traders I respect and look up to, Tom Sosnoff, of TastyTrade.com, is a strong believer that there is no edge in tracking activity in the options market. Now, I agree with him to a point, especially when he talks about big orders in certain ETF’s, Indices, etc. There is no edge in that kind of option trading. But, I don’t agree with him completely… here’s why. First, every option contract that is traded on one of the option exchanges must be reported to OPRA (not to be confused with Oprah). OPRA stands for the Option Pricing Reporting Authority. All time and sales of each option contract traded is made publicly available after each transaction is made. Second, by observing option volume and open interest, we’re able to identify if a trade is a new position, a closing or an accumulation. Option Volume refers to all of the options traded on a specific stock option/ strike price for that day. This includes options that are bought and sold. For example, on December 1st, 2014. There were 3,071 contracts of the Alibaba (BABA) December 12 101 puts traded.
Now, open interest refers to the number of contracts that are outstanding (open positions that have yet to be closed out) for a specific option contract/ strike price. For example, there were 3,071 contracts of the DEC 12 101 puts in BABA traded on December 1st, 2014. This was against 138 contracts of open interest. If you look at the option chain at the bottom, you’ll see the put volume and open interest for the 101 strike on the right hand side.
thinkorswim
Now, I use a specific type of software that gives me detailed time and sales information on the most actively traded options in real-time. For example, I know that over 2,000 of those 101 put contracts were bought (the options traded on the ask side). In fact, those who purchase The SIZZLE Method Report get a free 30-day trial to this incredible software. Of course, trying to decipher this type of information is where the real art comes from. It’s something that sets OptionSIZZLE apart from the rest. We’ve been teaching individual investors how profit off the moves of institutional options activity since 2008.
I get it though…some investors are still not convinced. They believe it’s too good to be true or obvious only in hindsight… and I can’t argue their point. Some people like to point out every instance where something worked– or post a ton of alerts on social media of unusual options activity– and give off the impression that they were part of it. But I don’t play that game! In [Case Study] How An Investor Made $1,557,500 In 18 Days With Options, I talk about how I missed an opportunity that was derived from tracking unusual options activity because it seemed so obvious— that I talked myself out of it. However, a few that I have taught my approach in The SIZZLE Method Report were able to profit from it. You might not believe or trust me that this approach can help you.. I understand that. However, I believe this can work for you…and it’s not always about finding some obscure stock, which is thinly traded and rumored to be the next takeover candidate. No way Jose…. It’s become much bigger than that. Sophisticated money is using options to make bets on specific sectors, countries, currencies, commodities and macro events. For example, while most investors were concerned about getting their traveling arrangements and plans in order for Thanksgiving week. The smart money was out in full force…and if you knew how to track these players like I do, there’s a chance you might of have participated as well. Let me walk you through exactly what I mean. The Event: The November 27 OPEC Meeting (Note: November 27th is Thanksgiving in the United States and the equity markets were closed) Also, November 28th, was Black Friday, a half day for the markets. What was the option market telling us ahead of the event? Short Energy Names and Buy Airlines
Outcome: Let’s just say they made a lot of money. On Nov 27th, OPEC decided not to cut output…which in turn caused crude oil prices to plummet. Leading Up To The Event: Let’s take a look at some of energy and airline stocks and see if we could identify a pattern. The chart below tracks option volume, the red bars displays put activity or for a move lower (bearish) and the green bars display call activity or for a move higher (bullish)…the combination of the two make up for the total volume. ConcoPhillips (COP)
(Data Source: Activ)
Notice volume picking up around November 21st, with two very large red bars on the 25th and and 26th. On November 25th, the stock closed at $71.73 a share.
(Data Source: Activ)
On that day there were over 51,000 options traded….over 44,000 on the put side. All in all, this was three times the usual options volume expected…however, it was heavily skewed towards to the put option side of the market. One of the largest single trades was a 6,744 lot of the weekly 11/28 72 puts which were bought for $0.45 On 11/28 COP closed at $66.07 …that one order alone was good for over $3.5 million in profits if the investor decided to cover their position at the end of the day. Chesapeake Energy Corp (CHK)
(Data Source: Activ)
At the time, CHK was averaging around 18,000 contracts of daily volume. On November 25th, over 19,000 put option contracts were traded. That’s right, there were more put option contracts traded than the total daily average volume.
One of the most interesting orders:
(Data Source: Activ)
Over 10,000 of these option contracts traded versus 1,241 contracts of open interest. At the time of this order, the stock was trading at $24.11. This means that someone was establishing a new position. (we know this because the option contract volume exceeded the current amount of option contracts already opened) Also, the stock would have to close ($23.50 minus $0.19) at $23.31 to break-even at expiration. They were betting on a 3.3% drop in the stock…and oh yeah…it was a half a day of trading on Friday. On 11/28 CHK closed at $20.26 …that one order alone was good for nearly $1.5 million in profits if they decided to cover their position at the end of the day. That wasn’t all though…. There was also some bearish activity in Haliburton and Exxon Mobil ahead of the event…which showed a similar pattern of near term put buying activity. If you weren’t convinced that the smart money was playing for an oil sell off…one would only have needed to look at the airlines to gain conviction. As heavy as the put buying was in energy names…the complete opposite was occurring in the airlines. After all, they’d be the ones to benefit from lower fuel costs. American Airlines Group (AAL)
(Data Source: Activ)
Notice the large green bars on November 21st and leading up to the event. On November 26th, a 4,000 lot of 11/28 $47 call options were bought for $0.12, when the stock was trading at $45.74. This occurred when there were only 94 contracts of open interest…so we knew for a fact that this was an opening bullish position. This implied that AAL would need to trade $1.38 higher by Friday expiration…just to break even. At the time, AAL traded around 51,000 total contracts per day. On November 26th, over 59,000 call option contracts traded alone. Well, on November 28th, AAL closed at $48.53…those deep otm calls from a couple days ago… were good for over 10 times your money. At one point, they even traded north of $2.00 per contract. This type of bullish call buying wasn’t limited to AAL…it was happening across the entire sector. United Continental Holdings (UAL)
(Data Source: Activ)
Notice the heavy call buying bar on November 25th. Interestingly, there wasn’t much volume the following day. At the time, UAL averaged around 23,000 total contracts traded per day. On November 25th, there were over 44,000 call option contracts traded alone. One interesting order was a 3,000 lot of the 11/28 $56 calls, which were bought for $0.56. Again, we knew that this was a new position because it was against 263 contracts of open interest. At the time of the trade, UAL was trading around $55.65. That means someone was willing to bet over $165,000 that UAL would trade above $56.56 by expiration Friday… and that’s just to break even. Well, On November 28th, UAL did better than that. The stock closed at $61.23. If the trader closed out of their position at the end of the day…they would have netted over $1.4 million in profits. And it didn’t end with these two airlines either. We saw this in Delta Air Lines and a few others. I don’t think I need to tell you what happened…but here’s another image for your entertainment. Delta Air Lines (DAL)
(Data Source: Activ)
Option volume skewed heavily on the bullish side on November 25th and 26th in DAL. Here’s Your Key Takeaways Identify a catalyst– In this case it was the OPEC meeting Identify the type of event– In this case it was a macro event. Often times, events can be stock specific or like in this case, it can impact several sectors all at once. Identify a pattern– By following the smart money, we could see that they were forming an opinion on the upcoming OPEC meeting. Bearish plays were being established in the energy sector…while bullish plays were being established in the airlines. It’s important to note, that many of the options traded were expiring within a few days…that helps us know that they were playing this binary event. Now, even if you don’t trade options…don’t you think this type of information can be helpful in your stock trading? For example, what if you were long a lot of energy stocks and were able to identify what the smart money was doing ahead of the OPEC meeting…would you have lightened up your exposure or hedged? A lot of times, tracking large institutional options activity is glorified–the ability to find that obscure stock that gets bought out and makes the option investor a ton of money. Sure, that’s
great…because those kind of opportunities do exist. However, following those who have skin in the game offers much more than that. And that is what I teach you in The SIZZLE Method Report. As we’ve just seen, we can use this information to generate trading ideas and hedge stock portfolios. With the surge in Exchange Traded Funds and Exchange Traded Notes…we’re no longer limited to individual stocks…we can use this information to generate ideas on macro events, currencies, commodities, countries, financials and much much more. If you’re ready to learn how to use this powerful technique and apply it to your option investing…it’s really simple to get started. The report is available to you for a small investment of $10. You can instantly download it…and you’ll also get a 30-day free trial to the options activity software and website (which provided these images).
Click Here To Access Yours Today! By the way, did any of you participate in the long airlines/short energies trade last week? If so, I’d like to hear about it… if so, did you use the options market at all to generate that thesis? I’ll be hanging out in the comments section below.
Hi I’m Josh, and I’m a finance guy. I cut my teeth in the markets on the Chicago Mercantile Exchange, so I saw firsthand how the “sausage was made” – and it usually wasn’t pretty. Because I quickly realized that fund managers only care about getting their fee's first even though 95% of them underperform the overall market. That didn’t sit right with me, so I left that world – And I discovered how to use my financial know-how to empower the little guy by using high-powered investing techniques – including the only “real time” market indicator the pro’s use to spot future price direction. Now I’ve shared my message with over 129,000 people like you, and everyday investors have suddenly started making money in the market for the first time. Make sure you visit http://www.OptionSIZZLE to access your FREE report and eBook that will teach you how to trade options successfully to help you create wealth, freedom & options for you and your family.