Unusual Option Volume

We review unusual option volumes


Premarket Movers


In the premarket we detected the gainers outnumbered the decliners by a 4 to 1 ratio setting up for a bullish opening. COIN was trading +5% higher in the premarket, rebounding from a steep broad based sell off in the crypto currencies.


Unusual Option Volume


The unusual option volume report shows a list of stocks with option volume above its average daily volume. Many traders will use unusual option volume as a starting point to find trade ideas. This can point to stocks that something is going on and needs further attention. It is always important to do further research and try to determine what is the potential catalyst for a good idea or the thesis behind the trade. https://marketchameleon.com/Reports/UnusualOptionVolumeReport


Unusual Volume:  We defined volume in options as unusual if the volume on the day is more than 2X its average daily volume based on the last 90 days.


Volume Statistics: The volume can be analyzed in more details to gain more insights to the trading activity


* % Calls vs. % Put Volume let's us see what percentage of the volume was traded in call options vs. the put options


*$ Notional traded is a different way to view the trades. Since option prices have different premiums, we look at how much total, in dollar terms, was traded in the call vs put options. An example we gave: if 1 call contract trades for a penny and 1 put option trades for $1 there is an equal amount of call and put volume but the amount spent on puts far exceed the amount spent on calls.



Other relevant Information: Once we know that the option volume is considerably higher than usual, it will be helpful to take other relevant information to paint a more clear picture of what is going on.



*Stock Price:   Is the price moving lower or higher? This will indicate if there are more buyers or sellers in the stock. Are traders behaving in same or opposite direction of the options flow?


*Catalyst Events:   Are there known upcoming or recent events that warrant attention. We look at indicators for upcoming earnings announcements or company events such as investor meetings or conferences. If the CEO or management is scheduled to participate in an upcoming event, there can be news on future outlook of the business, new product announcements, or, in the case of healthcare stocks, we can learn about current results on drug tests and so forth.. The point is that these events can be a potential catalyst for stock movements in the near future.


*Implied volatility:   Is the implied volatility moving up or down on the day? If implied volatility is moving higher than it suggests that there are more buyers of option premiums and expectations of future volatility for the underlying stock is increasing. If implied volatility is moving lower, it suggest that there are more sellers of options premium than buyers. Besides looking at the change in implied volatility, we want to look at the implied volatility relative to its historical levels to gain insights if the level is high or low. To help us with this, we use the implied volatility percentile rank. The percentile rank will tell us how many of the historical observations were below the current level. For instance, an implied volatility percentile rank of 88% means that 88% of the days (using last 252 days) the implied volatility was lower and 12% were higher.


*Option Moneyness:   We can also breakdown the option volume by moneyness. We may want to know what percentage of the volume is in out-of-the-money calls. This will tell us if traders are coming for options that are above the current stock price. We can also view what percentage of the trading is at-the-money or strikes near the current stock price or in-the-money. It is a way to get quick insights into the strikes people are targeting.




Questions Asked During Video: We received a couple good questions on the chat worth mentioning


How often is the open interest updated? 



The open interest comes from the options clearing corporation https://www.theocc.com/ The OCC calculates the open interest based on end of day settled trades, taking into consideration any exercises/assignments, broken trades, splits, corporate actions etc.. The open interest is reconciled overnight and made available to us from our vendor the next business day. We display the open interest after we process the data. The open interest does not update intraday or real time. It is made available once a day.


What is more important, volume or open interest? 


Option volume and open interest tell you 2 different things. Volume represents the amount of option contracts traded hands on the day and open interest tells you how much outstanding obligation remains after trades are cleared. It is helpful to understand this through an example:


Lets say that Person A buys 10 call options from person B.


Scenario 1:    Volume 10 and Open Interest 10


This initial trade creates a volume of 10 contracts because 10 contracts traded hands. If nothing else happens that day (such as exercises, other trading etc..) then the next day there will be an open interest of 10 contracts because there are still 10 contracts open with an obligation of the seller B to the buyer A before expiration.


Person A buys from Person B


Scenario 2:   Volume 20 and Open Interest 0


Now lets change the circumstances and say that on the same day Person A changes his mind and sells his 10 call options back to person B. The volume on the day will be 20 because there was the initial transaction to buy 10 and then a transaction to sell 10. And if the transaction happened between the same parties (Person A and Person B) the next day there is zero open interest. Both positions were closed.


Person A buys from Person B

Person A sells to Person B


Scenario 3:   Volume 20 and Open Interest 10


Now lets assume that Person A that bought 10 contracts from Person B sells the 10 contracts the same day but sells the options to Person C. In this situation, the volume is 20 because there was the initial 10 contracts to buy and then subsequent 10 contracts to sell. But the open interest the next day will be 10. The reason behind this is that Person C now has the long position and Person B still has the short position.


Person A buys from Person B

Person A sells to Person C

Person C is long position and Person B is short