How Unusual Option Activity Can Help the Little Guy

March 3, 2021

There's always a hot stock of the day…

But, there are 6,000 companies traded on the major exchanges and an extra 11,500 traded over the counter.

That’s a lot for any trader or investor to comb through each day, especially for the little guy.

In the 1950s, retail investors controlled 95% of all trades. Today 90% of trades are executed by professional investors.

But there's a way for the little guy to leverage Wall Street strengths for our gain.

Here's how it works.

Institutional investors are always looking for the big gains, that's the game.

In order for them to have an edge against others, they have a whole team of people, plus their own tips and tricks of the trade.

Individual traders and investors can find themselves with limited time and information. Meaning that any way to piggyback off those big players can be helpful.

This is where unusual option activity comes in.

Currently more than 5,000 stocks and several hundred ETFs are optionable. Stock options allow for hedging or speculating on the underlying stock.

Without going into all the nuances of options, there are two types: put options and call options. Each options contract is based on a block of 100 shares and gives the buyer of the contract the right but not the obligation to take an action in the future.

A put option allows the buyer to sell shares at a set price at a later date. This is essentially a bet that the underlying stock will fall.

A call option allows the buyer to buy shares at a set price at a later date. This is a bet that the underlying stock will see a price increase.

How does this help you?

To see what institutional investors are doing with their money, we have to look for unusual option activity. Or more specifically unusual volumes in specific options contracts.

How to Steal the Best Ideas from Wall Street

If there is an unusual amount of volume on a particular put contract, we can assume that big money is hedging.

They know something that makes them believe the price of the underlying stock will drop before that option expiration date.

On the other hand, if there is an unusual amount of volume on a particular call contract, we can assume that big money is speculating in the other direction.

Maybe there is an announcement or an event coming up. Maybe it’s a government approval or regulation affecting business.

But we can infer that there is reason to believe that share prices are going to go up.

This is essentially a legal way to steal some of the best ideas from the largest players on Wall Street.

All you have to do is look at the average trading and wait for that unusual activity. When you see unusual volume activity you know it’s big money.

I first noticed this when I worked on the floor of the CME. Whenever an unusually large order comes in, you can bet it came from some mega-rich, well-informed Wall Street firm.

The smart money always followed those trades to profit alongside them. We used to call those smaller traders “locals.” And they had plenty of success trading this way.

It still works to this day. But you don’t need to be on the floor of an exchange to see it. Recognizing unusual option activity simulates overhearing a large order come through.

Let me give you an example from just this week.

2,000% Jump After Unusual Option Activity

Rocket Companies Inc. (NYSE: RKT) has been in the news all week as a potential target by the Reddit Wall Street Bets community.

But you didn’t have to scour internet forums to guess at what was about to happen. If you paid attention to unusual option activity, it was clear a big move was on its way.

On Monday, within a five-minute window, 2,500 contracts for RKT March 12 $27 calls at $0.74 cents per share came through.

Now, that 2,500 trade comes out to be around $185,000, which doesn't sound like a lot when you compare it to other stocks. But this activity was unusual in comparison to its previous weeks’ option trading volume. 

No one would risk that much, which they would lose every dime of, if prices didn't soar higher in the next 11 days. And if they wanted to control the same amount in stock, they would need to purchase $1,440,000 of stock. That would have likely moved the market more.

So, it was indeed unusual. Now, look at what it predicted over the following day:

Disclaimer: The profits and performance shown are not typical and do not guarantee future trade results.

You can see the large blue bar at the bottom left. That’s this 2,500 contract trade.

The next day, those contracts, which were bought at 74 cents per share, jumped to $16 per share. That’s over 2,000% returned in about a day and a half.

This is why I've been following the money in the options market for the last 15 years. 

Everyday, we see this type of hot option activity. Not all are massive winners like this, but I’ve seen a consistent edge the last 15 years and why I've been sharing it with the little guy to profit as well.

I have my own system that searches these kinds of trades out. But I know coming up with your own system isn’t easy.

Over the next few days, I’ll be discussing how it works and how you can use this kind of strategy yourself to hopefully predict these exact kinds of price movements.

It’s a lot of data to comb through, but when you see one of these opportunities, you can profit big off that information. Lucky for you, I will be letting you in on my best secrets for cashing in on this pattern.

Stay tuned.

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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