What is Option Flow?

Every trading day, millions of dollars worth of option contracts are bought and sold.  Fortunes are made and in only a few trades, lifestyles change forever.  But how do the best traders maximize profits and minimize losses?

They learn how to read option flow and incorporate it into their strategy.  What is option flow?  Option flow is tracks when large amounts of options contracts are transacted.  It tells traders what stocks are about to move, how far the expected move is and how long it will take for the move to occur.  Imagine that you just discovered a cheat code to your favorite video game.  You know can get option data to show you expected directional movements.  However, not understanding how to read option flow can lead to horrendous losses.  Lets look into option flow and show you how to read the data to maximize profits.

1. What is the Fill – A fill is the result of an order execution to buy or sell securities in the market. So, in the world of stock options, if the fill is an “Ask” it tells traders that the position is being bought.  If the fill is a “Bid” it tells the trader that the options contracts are more then likely being sold.  Check out he highlighted “FILL” column in the image below to show the difference in asks and bids.

2. How far away is the Strike? – The strike price on an options contract is the price at which the underlying security can be either bought or sold once exercised.  It tells traders what the expected price target for these large orders are. Understanding the strike                helps identify potential exits.  Look at the image below showing the Alibaba (BABA) with several large option contract orders betting on the $75 dollar strike.  This tells us that $75 is a great first target for BABA in a bullish direction.

3. How long is the DTE – Days till expiration or DTE tells us how long the option contracts have till the contract exercise takes place.  Shorter DTE means that the trader that bought the large option order expects the stock to move fairly soon. You will see this on upcoming earnings plays or notice it being timed with news that effects to stock.  Short DTEs with Strikes farther away from the current stock price lead to aggressive moves in the stock.  Check out the image below showing TSLA calls betting on a move anywhere from 5-11% in the next 12 days.

So as you can see, learning the basics to reading option flow can sharpen you skills and build more consistent profits.  All of the examples were gathered from TradeUI.  Their platform provides traders with real time option flow data that can filtered down to match  Fills, Strikes, DTE and many more features traders prefer to look at. Check out the link to view TradeUI and start giving yourself an Trading Edge!

https://tradeui.com/?wpam_id=23