Follow in the footsteps of elephants..
What do we mean by this?
When an investment stock options
option volume and implied volatility
increase significantly, it is often a harbinger of things to
come. Although the investment stock options price action may
seem quiet and uneventful, not reflecting any unusual activity,
the investment stock options option activity can be telling
a very different story.
An unusual and greater than normal increase in the investment
stock options option volume or implied volatility can be an
indication that large, informed smart money players (the elephants)
are placing bets on upcoming events or announcements. These
announcements can often have a significant impact on the price
of the underlying investment stock options, as with important
corporate earnings, or other news.
These smart money traders or insiders who have privileged
information will try to act on these investment stock options
before it becomes public knowledge. The trading of investment
stock options allows these well informed investors to increase
their leverage and enables them to maximize their gains without
risking their identity.
So how can we, as retail investors, benefit from this knowledge?
A significant increase or abnormal fluctuation in the trading
volume of a stocks options and/or a substantial increase in
the daily implied volatility of the stocks options can be a
precursor of a major movement of the respective underlying investment
Sudden changes in options volume and implied volatility can
be a tip off to potentially explosive moves in individual investment
stock options. A move of great magnitude is almost always going
to be fueled by news, but correct analysis of option order flow
can alert one before the news is disseminated to the public.
Often this type of news strikes hard at the heart of a companys
future prospects for growth and profitability.
Examples of these types of news are the following:
- Earnings substantially better or worse than Wall Street expectations
- New product developments or breakthroughs
- Mergers and acquisitions
- Upgrades/Downgrades coverage by Wall Street Analysts
- Media coverage
- Products waiting for FDA approval or in clinical trials
And fairly often, this type of news is leaked. The people and
organizations that know about this information will use it to
their advantage. By looking for this unusual option order flow,
traders can spot unique opportunities in investment stock options
and bank big profits just by following in the footsteps of
There is more to this strategy than we will get into here, like
making sure that there is not also abnormal options size on
the opposite call / put options (usually just indicates hedging),
but it still can be a very effective clue to be aware of.
Since wagers are based on irregular movements in respective
companies, this strategys performance is not dependent on interest
rate stability, favorable investment stock options market environment
or any other market factor. This may present major profit opportunities,
and returns can sometimes be far superior when compared to other
strategies to profit from investment stock options.
Conclusion: this trading strategy analyzes investment stock
options data for the purpose of identifying significant increases
(or abnormal fluctuations) in trading volume and volatility
of the stocks options as an indicator of movement and the timeliness
of that movement in the underlying security. Options order flow
analysis can be an indicator of smart money positioning, prior
to publication of significant business announcements.
Another clue traders can look for, when trying to profit from
investment stock options, are block trades on the TOS (Time
of Sales) reports. This is a related strategy, and does not
necessarily indicate insider buying, but can alert the astute
trader to large institutional blocks of options being bought
on either side of the underlying investment stock options.
For example, if the average investment stock options
on a particular stocks options is 5, 10, or 20 contracts, and
you suddenly see large blocks of 200, 500 or 1000 contracts
going into the close, then this is sometimes noteworthy and
worth paying attention to the underlying investment stock options.