In Stock trading, with all the algorithmic, high frequency trading and simply the massive amount of money thrown around, makes it impossible to understand who is doing what from Time & Sales or even with Level II quotes. However, Options because there are SO many strikes, and So many months for each Underlying security (or asset) if you know where you look, its actually quite simple to see what was traded, and what was the intention of the trade. In essence, you can follow large institutional players that make their bets on the Options market, because it's much easier to see their trades and understand what kind of bets they are making. This just requires a very basic knowledge of options and how markets work. No Deltas, Gammas, Thetas or calculus.
To begin, you need to have a fairly standard Options Trading Platform and Scanner. ThinkorSwim is what I use, you can even sign up for a demo account to see the tools offered. But also, there is a website www.livevol.com that offers a free version which is very useful as well.
I have a scanner set up to search for "abnormal" volume. This when the volume on a particular stock option sees more than the usual volume on any given day. Some scanners or sites refer to this as the Sizzle Index. Many break it down even further to Call Sizzle and Put Sizzle. Using this, you can easily scan for stocks where the Options Volume traded that day was "abnormal". I like to set my scanners to looks for stocks where the Options volumethat day was at least 1.5 times the average volume. Also, just to keep out tiny stocks I suggest choosing stocks that have a daily volume of at least 2 Million and over $10. Once I run my scanners, I start from top down, starting from the stock with the Highest "Sizzle Index" for the day.
It helps if you have a separate column that breaks it down to Calls Sizzle and Puts Sizzle, but it's not necessary.
Once you have a stock with a High Sizzle Index, simply pull it up in an Options Chain.
With the criterias above for your scanner, once you pull up an Options Chain, it's usually easy to spot the Strike and month that caused the abnormal volume.
Just as an example Today (6/3/10) AYE came up on my Scanner well over 5 times the average volume. Skewed heavily towards the calls, even if you didn't know it was mostly from the calls, once you pull up the options chain it would have been very easy to spot. A nice round 1000 contracts were traded on Jul 22.5 calls. With an already 20,920 outstanding open interest. Now that we've determined WHAT was traded, we just have to see what the intention was. This part gets a little tricky, but with the right tools and some practice, it's nothing difficult
The next step requires you to pull up Time & Sales for that particular Option, which livevol.com provides for free (its just delayed by 15 mins) if your broker doesn't already provide this to you for free. We see that Jul 22.5 calls were traded 4 times, 500 contracts, 100, 200, and 200. But because they were traded with 1 min of each other, we can confidently say they were traded by the same institution. Keep in min 1000 contracts controls 100,000 Shares, at $20.62 a share, that's a $2 Million bet. We also see that they were traded for 20 cents, which is clearly the ASK price at the time which indicates they were bought. (traded at ASK Price = likely they were bought, BID PRICE = likely they were sold) Many time & sales will display each sale as RED or GREEN, making it easier.
Hence, from all this work, we can confidently say that there are large institution out there that thinks this stock will be above 22.5 by Expiration date in July. With the stock trading at $20.62 at the close of today, that's still almost a $2 gain. That works out to be about a 10% gain in less than 2 months time if this plays out. Now this is no exact science or should it be a sole determination for buying this stock, but it gives you a peer into institutional desks and what they are betting on.
Also note, that every time there is abnormal volume DOES NOT mean that there is something going on. Sometimes it could indicate an institution closing a position, which is no good to us. Sometimes they were trades for options very far out (LEAPS) or very close to the money, those are also not really useful for us. Or sometimes, its just hard to tell because the volume was spread out over many months and strikes. Most days I can get at least 7-8 stocks to look at from my scanner, and will usually yield at least 1-2 clear indications. But it really pays off when you can find that one institution that's making a bet over 10,000 contracts. Legg Mason yesterday had a 40,000 contract spread traded, where 20,000 Jul 27 Puts were sold to buy 20,000 Jul 32 Calls. Also another institution a few days prior sold 10,000 Jul 29 Puts to buy 10,000 Jul 34 calls. These are all HUGE bets made with very strong convictions, which the average trader would never have known were made, but this is publicly available information. Many times these large traders step in around 10-11am EST, they tend to avoid the first half hour. I will continue to post more examples of these to help explain this further.
Could you possibly run through the process, step by step, of setting up the TOS platform to show the option volume at 1.5 X the normal? I cannot find that selection on the scan tab. Thank you.
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