What is unusual option activity?

Millions of options trades exchange hands every day. Not all of them are made equally, that’s for sure. Some carry more information than others. Unusual option trades are that type of option trade.

Unusual option activity is defined as a single trade that is bought on the ask or sold on the bid, with unusual volume and/or trade size compared to the open interest for that particular strike and expiry. This means that these are new contracts being traded, expressing a fresh opinion on the underlying.

Why is this interesting? Well given a large enough trade and it being bought on the ask or sold on the bid it shows extreme urgency on the trader’s side.

For example, let’s say a hypothetical trade happened of 5k calls which had a spread of $3.00 by $3.70, and the order was executed at $3.70.

What does that tell us?

The trader bought 5k calls, dropping $1.8M on the trade. Now, if they tried to middle their order, say $3.35 and got filled, they could have saved potentially $175K, but they didn’t. To me, that says they have high expectations for this trade, and saving $175K is chump change.

This paired with the unusual high daily volume and size of the trade makes this type of trade very interesting, carrying a signal that there is a likelihood of a potential large move in the underlying stock. Unusually large purchases of options contracts indicate that someone thinks there is an impending event that will move a stock in a big way.

Optionsonar makes it easier to discover such trades by actively scanning for them and alerting you when they are found, sorting them by expiration and strike prices to offer you unique insight into this strategy that was only available to institutional investors.

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