Options flow data is a powerful tool for traders, providing greater insight and information when trading options contracts. The term Options flow data can refer to one or more of the following: options order sentiment, unusual options activity, option sweeps, or just ‘order flow’. What advantage does this information provide, and how can it help to produce better results within markets?
Compared to available market data with stocks and equities, options data is more detailed and transparent. While trading stocks can occur privately over-the-counter (OTC) or in darkpools (splitting up large orders and trades to hide intentions), it is not possible to hide such large trades with options contracts. These contracts can offer a better look at the overall sentiment behind more significant moves in the market, especially by larger players or smart money.
Although market data for options contracts is more comprehensive, data providers charge a premium for real-time access, and an effective alert system or options scanner requires some configuring to help identify meaningful signals. A good system or scanner is one that will indicate any significant volume change or unusual activity in options trading. While these signals do not ensure or guarantee a specific movement or price action, they do reveal the sentiment of larger players or market makers and the deployment of capital.
Market makers are fast movers. They act quickly on news releases and information obtained from association and their obligations to managing large assets in others’ interests. From these actions, it is possible to better estimate the performance in the underlying asset within specific timeframes. Again, these signals are not meant to provide certainty or guaranteed movement, but to provide sentiment and insight where big money believes prices will go. For example;
A large number of unexpected calls above ask (AA) appears, this kind of signal would suggest that positive developments or news is coming or released and the outlook is bullish. Alternatively large orders below bid (BB) could imply that less favorable news and information is coming to light, and the outlook would therefore be bearish.