How to Effectively Use Options Flow

Options flow has gained great traction over the last few years. With a booming retail trading market, more people are trying to leverage options flow to gauge market sentiment and get ahead of others. In this post, we are going to talk about some tips on how to effectively use live options flow on TradingFlow to find excellent trading setups. Since millions of options are traded every day, finding solid setups can sometimes be like finding a needle in a haystack. Therefore, one needs to understand different technicalities of options flow to separate the wheat from the chaff. This post will assume that you already know what calls and puts are. If you do no, please refer to this tutorial before continuing with this post.

Type of Options Orders

Before we dive into the tips and tricks of using options flow data, we need to first talk about three different kinds of options orders that you will often see - Sweeps and Blocks.

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1. Sweeps

Sweeps are orders that are split up into smaller trades and are completed via multiple exchanges. There are many reasons traders often trade via sweep orders.

First, if someone has some extra information about a company and they are confident that the price will move in a particular direction, they will want to hide their knowledge by using a sweep order. Since sweep orders are filled as multiple small orders, most people are not able to see the underlying large activity. Second, if a trader wants to get their order filled as soon as possible, they can often choose a sweep order to leverage the liquidity from multiple exchanges. In essence, a trader either wants to hide something or is in a hurry to complete a trader. Because of this fact, sweeps often provide us a signal that someone knows something that we do not which is why they are trying to hide their trade or get it filled as soon as possible.

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2. Blocks

Blocks are just very large single trades. Usually, its large institutions buying or selling a very large number of options contracts. Those are considered as blocks in TradingFlow Option Flow Dashboard. More specifically, any trade with at least 5000 volume is considered a block trade.

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Tips on Finding Effective Setups

Now that we know what each order type means, we can discuss some concise tips on how to effectively find good setups using options flow. These tips are quite subjective and come from our own experience in using live options flow to find trades. There are always more ways to look at the flow since it is more of an art than a science. However, we hope these will prove useful to you in your journey of becoming a better trader.

• BURSTS ARE GOOD: Bursts of sweeps, and block trades with large premiums are often very useful. That can sometimes mean an event is about to happen and the people who know about it are promptly getting in before the price makes a big move.
• ASK SIDE SHOWS CONFIDENCE: Sweeps, or blocks, when traded around the ask price often provide strong signals. That means a trader is willing to pay around the ask price for the contracts. This shows confidence.
• SHORT EXPIRATIONS DEMONSTRATES URGENCY: Similar to how a trade above ask provides confidence, trades with very short expiration dates also show urgency and confidence since traders are confident that the price will move in the desired direction very soon.
• SKIP THE SPREADS: Very often, it is hard to identify whether a trade in the options flow is a buy/sell or part of a complex strategy like spreads, strangles, etc. For newbies, it is often better to skip all trades that are parts of strategies as it is slightly harder to infer directional signals from them.
• KEEP AN EYE ON FAR OTM STRIKES: Whenever you see a large amount being spent on very far out of the money strikes, be on alert. Sometimes, if investors are confident in a large move, they will buy far out of the money strikes which are cheaper than in the money and at the money strikes.
• VOLUME > OPEN INTEREST IS IMPORTANT: When volume or a trade is higher than the open interest for the options contract, that can also sometimes depict urgency and confidence. That happens because smaller open interest demonstrates lack of liquidity. If an investor is still willing to trade the contract, that means they are confident.

Final Thoughts

Finally, we would like to reiterate that analyzing options flow is more of an art than a science. Please spend time looking at historical patterns and build your own strategies. Options flow contains a rich amount of data that if used correctly can immensely improve your trading.

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