How to Read Options Activity for Clues to a Move

NASDAQ: CBOE | Cboe Global Markets Inc. News, Ratings, and Charts

CBOE – Today’s featured article covers How to Read Options Activity for Clues to a Move. Continue reading to find out all these important investor details.

Using option activity as an indicator of impending price moves is difficult, subjective, and unreliable. That being said, it can help confirm other indicators and increase the probability of a profitable trade.
Indeed, there have been many situations in which activity in the options pits accurately predicts or presages an impending price move.

There are 2 basic approaches: as a contrary indicator, or as a predictive.

Contrary readings are predicated on the belief that prevailing investor sentiment is often wrong. Buy and sell signals are usually generated when readings hit extreme levels — such as a spike in the put/call ratio or the Volatility Index (VIX) — to flag a market bottom.

The predictive approach toward options activity says this information may actually reveal what the “smart money” is doing. Using options as a predictive indicator is more effective when applied to individual issues, rather than to broad indices or the market as a whole.

Here are some basic criteria for identifying meaningful activity and avoiding the chase for an activity that ends up being useless noise.

Volume and Volatility 

One of the first obstacles to interpreting unusual options volume is that, for every buyer, there’s a seller. It’s therefore important to decipher who initiated the trade. This can usually be determined by looking at the time and sales data; if most of the volume was done at the offer price rather than the bid, it’s safe to assume the buyer initiated the trade.

Look for an increase in trading activity and an increase in open interest. More specifically, the volume should be at least 3 times the average daily volume, focused on near-term options and 1 or 2 strike prices. The volume should exceed the prior open interest, which indicates the activity is a new position rather than a liquidation. Also, be aware if there’s an impending known news event — such as earnings or a regulatory ruling — which could be causing the speculation.

Make sure the volume isn’t the result of a spread trade — the simultaneous purchase and sale of similar options that have different strike prices or expiration dates — done in conjunction with stock. A spread or buy-write are much more neutral trades than the outright purchase or sale of options. Checking times and sales of various strikes with similar volume will reveal if these trades are outright purchases or part of a spread.  

Next, look at the size of the transactions; if the volume is being done in large blocks of 100 contracts or more, one can assume it’s an institutional buying rather than retail traders. The former tend to have better information than the latter. If it’s institutional buying, it tilts the trade toward being “smart money.” If it’s the latter — that is, a bunch of 10- and 20-contract trades — it may be nothing more than people following a newsletter recommendation. Then, as the volume hits the unusually active list, you’ll get more people jumping on the bandwagon and it feeds on itself. Those trades usually don’t work out. 

There is also some software and services such as which get trade data directly from the exchanges that can provide real-time stream of options transactions including the number of contracts, price and if its spreads or tied to stock.  Such services can be fairly expensive running $3,000 to $5,000 a month.

The implied volatility, or value of the option, should increase even if the price stock doesn’t. This indicates that the buyer doesn’t mind paying the extra $0.10 or even $0.20, which on a $1 item, is a significant percentage premium to gain the leverage of options. Even though options have an unlimited supply, unlike stocks that have a limited number of shares, if demand is greater than the desire to sell then price will increase.

Look for spillover into other strike prices. Market makers typically take the other side of the trade – that is, they’d be selling calls to facilitate the transaction and then immediately hedging or offsetting their position through the underlying stock to remain delta neutral, and most of the options volume would be focused in a single strike. But, if the market makers believe the buyer has good information instead of hedging in the stock, they might buy other options. This can create a position with a positive gamma, and you would see a spillover of activity into other strikes.

A Lot Going on But Nothing to See

Technology has made the job of identifying unusual activity a lot easier but its application much more difficult. Electronic trading allows parties to execute a fairly large option order quickly and, more importantly, anonymously – particularly if they’re privy to, or have a hunch about, an impending price move.

In the past, when orders needed to be worked in person on the trading floor, not only did it take longer to execute the transaction, but it also was transparent as to who was doing what.

Now, with intraday activity disseminated in real-time, there’s not only basic software but a multitude of sites and services that track trading volume and volatility. The result is the list of names with “unusual activity” that can run to 20 or 30 a day.

Clearly, the majority of these instances will prove to not be predictive or produce profitable trades. That’s why it’s important to try honing in on what is truly notable rather than something that’s simply unusual.


VIX shares were trading at $331.63 per share on Friday afternoon, up $0.71 (+0.21%). Year-to-date, VIX has gained 3.04%, versus a % rise in the benchmark S&P 500 index during the same period.


CBOE shares were trading at $116.81 per share on Friday afternoon, down $0.72 (-0.61%). Year-to-date, CBOE has declined -2.66%, versus a 3.03% rise in the benchmark S&P 500 index during the same period.


About the Author: Option Sensei


Steve has more than 30 years of investment experience with an expertise in options trading. He’s written for TheStreet.com, Minyanville and currently for Option Sensei. Learn more about Steve’s background, along with links to his most recent articles. More...


More Resources for the Stocks in this Article

TickerPOWR RatingIndustry RankRank in Industry
CBOEGet RatingGet RatingGet Rating

Most Popular Stories on StockNews.com


Is This REALLY a Bull Market?

The S&P 500 (SPY) keeps making record highs...but does that mean that market conditions are truly bullish? 44 year investment veteran shines a light on how hollow recent gains are as they are only accruing to a handful of stocks with most investors searching high and low for stock market gains. Read on for more...

Unveiling Adobe (ADBE) Q2 Earnings: What Lies Ahead for Investors?

Software giant Adobe Inc. (ADBE) has released its second-quarter earnings, revealing double-digit growth in both revenue and profits. Yet, concerns arise around the complexities of navigating growth in the face of advancing AI technologies. Let’s analyze ADBE’s recent performance and assess key fundamentals to uncover what lies ahead for investors…

3 AI Stocks to Invest in for the Next Technological Revolution

The AI market is experiencing a significant growth trajectory, driven by widespread application across various industries. Hence, it could be wise to invest in top AI stocks, Alphabet (GOOGL), Meta Platforms (META), and Alibaba Group Holding (BABA) for the next technological revolution. Read more...

Analyzing Broadcom’s (AVGO) Q2 Earnings: Worth Investing?

Driven by a surge in demand for its AI products, Broadcom (AVGO) reported robust earnings in its latest quarterly results, exceeding expectations on both top and bottom lines. However, is the stock’s recent announcement of a 10-for-1 stock split worth investing in? Keep reading to find out…

Bullish or Bearish Stock Set Up?

The S&P 500 (SPY) record highs sounds pretty darn bullish on the surface. Yet as we dig below the surface there are some curious signals that point more Risk Off. This is especially true as we come into the next Fed meeting after a round of data that points to inflation still being too high...only further delaying the first rate cut. What does this all mean for stocks from here? Steve Reitmeister offers his latest views on the market outlook along with a preview of his top picks to stay on step ahead of the market. Read on for more...

Read More Stories

More Cboe Global Markets Inc. (CBOE) News View All

Event/Date Symbol News Detail Start Price End Price Change POWR Rating
Loading, please wait...
View All CBOE News