3 Ways to Identify Unusual Option Activity

March 4, 2021

Finding the right options to trade is challenging.

There were 43 million options contracts traded yesterday, which was $12.5 billion changing hands.

And there are dozens of trading platforms and computer algorithms acting on these trades within microseconds.

This is worlds apart from the days pit trading and screaming floor traders in Chicago.

Now, there are 16 option exchanges now competing for business.

But all of this does, in some ways, democratize these kinds of trades.

Even though I’m no longer one of the floor, and presumably you aren’t either, we can still see the tape.

We can see these trades in real time and get in on fast-moving ideas.

But with that many transactions daily, we need to use machine learning to identify the best real-time and then use our eyes to investigate.

I’ve already introduced the idea of following unusual option activity. If done right, creating a consistent profitable options trading approach following this activity is viable.

But unusual option activity by itself isn’t all that helpful. It is broad and can signal something completely unrelated to a major move coming.

Fortunately, there are ways to identify specific unusual option activity that is helpful.

In fact, I’ve narrowed down three of these ways you can start using right away to separate the wheat from the chaff.

Here are my three main scans I use to find the best options trades…

No. 1: Strike Specific Scan

With each of these scans, or screeners, you first have to drill down into some specifics. The first one is based on a specific strike price.

This is a narrow scan looking at one particular contract of an options chain.

Here are the criteria:

  • Today’s Volume > Open Interest by 200% or More For a Specific Strike Price
  • 50% or More of That Volume Traded at the Offer Price

This scan works great to identify specific contracts that are blowing up on a particular day. This can indicate that a large amount of money is targeting a very particular trade, which you might want to follow.

The larger-than-average volume obviously indicates unusual option activity. The 50-plus percent offer price criterion indicates these were opening trades.

No. 2: Unusual Volume Scan

The second way to identify a profitable unusual option activity trade is based more around the overall option chain itself, including all of its different strike prices.

Here, rather than looking at a specific strike price, consider all of that particular stock’s option activity for the day.

The two criteria for this trade are:

  • Today’s Volume > Average Daily Volume by 200% or More (over a specific number of trading days)
  • 50% or More of That Volume Traded at the Offer Price

This is a slight variation of the first, in that they both share the offer price criterion. They also both look at today’s volume.

The difference, which is why you might want to look at both separately, is that this way focuses on overall daily options volume.

It tracks and compares what’s happening today vs. other recent days to highlight unusual option activity.

You can tweak how the number of trading days you want to compare to your liking.

No. 3: Hot Money Scan

This third way is closest to my heart. I use it often to find trades for my Hot Money Trader subscribers.

What truly separates this scan from the others is its time factor.

Here, the criteria are more interrelated. Rather than two distinct factors like the other ways, this combines time with volume and open interest.

For my Hot Money Scan, I look for Today’s Volume > Open Interest by 200% and WITH Days to Expire of Less than 180 and 50% or more traded on the offer.

As you can see, there are more moving parts. But that only helps identify the best potential big money trades to get in on.

The volume greater than open interest is obviously the first unusual option activity indicator.

Since volume has then exceeded open interest and with 50% or more traded on the offer, this indicates that it's a new opening position.

This final scan’s time to expiration helps find ideal trade opportunities likely to jump right now.

Clearly, there’s a lot more a seasoned options trader can and should look for.

But these three scans are the ones I run everyday and where I start identifying unusual option activity and narrowing down which activity indicates a profitable trade.

Here's to living rich,

Joshua M. Belanger

Joshua M. Belanger
Joshua Belanger is founder of CounterVest and the editor of Hot Money Trader. He has been providing ordinary investors blockbuster returns since 2008. In 2018, the average return of Hot Money Trader beat the markets by over 15%

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