Unusual options activity
Most option contracts trade a little each day. Now and then one trades many times more than usual, sometimes ahead of news. Unusual options activity is the practice of finding those contracts and asking who traded them, and why.
Volume and open interest
Two numbers describe a contract's trading. Volume is how many contracts changed hands today. Open interest is how many contracts were open at yesterday's close; it is published once a day and does not change during the session.
The comparison between them is the heart of it. If a contract has an open interest of 1,000 and trades 300 today, those trades may all be existing holders closing out. If it trades 5,000, most of that volume cannot be closing trades: there were only 1,000 open. Someone is opening new positions, and in size.
What counts as unusual
A ratio alone misleads: 500 contracts against an open interest of 1 is a ratio of 500, and may be a few thousand dollars. A useful definition asks for size as well as a lopsided ratio. Options Meerkat flags a contract when all of these hold:
- its volume is at least 3 times its open interest,
- at least 500 contracts traded, and
- at least $50,000 of premium changed hands.
The flags are then ranked by the money behind them, not by the ratio, so the large trades come first. The thresholds can be changed in the alert rules.
Reading a flag
A flag says that size went through; it does not say which way. Three things help:
- Where it printed. Trades at or near the ask were most likely bought; at or near the bid, most likely sold. A large call volume bought at the ask reads differently from the same volume sold at the bid.
- What else traded. A call bought together with a put sold, or two strikes traded in the same size, may be one spread rather than a directional bet. A large print in one contract may be the hedge of a stock position.
- When it expires. Short-dated, out-of-the-money contracts bought in size are the classic speculative trade; longer-dated ones are more often hedges or positioning.
Confirming it the next day
Open interest settles the question overnight. If a contract traded 5,000 and its open interest rises by about 5,000 the next morning, the volume opened positions. If open interest barely moves, the trades were opened and closed within the day, or were closing trades after all. A flag that does not show up in the next day's open interest was probably not the position it looked like.
A word of caution
Unusual activity is not inside information, and large traders are wrong as often as anyone; many large trades are hedges whose profit comes from somewhere else. Treat a flag as a question to look into, never as a reason to trade on its own.
In Options Meerkat
The dashboard's uoa column counts each symbol's flagged contracts, lit when there are any. On a symbol's detail page the unusual contracts are listed with their volume, open interest, premium, and where the last trade printed against the bid and ask, and the flow page shows the session's large prints and the premium traded on each side across the market. The watch rounds can alert on new flags, on the dashboard and on Telegram, and optchain unusual --confirm reads the next session's open interest against a day's flags to say which opened positions.