How to Profit from Unusual Options Activity

Unusual Options Activity (UOA) is a scan traders use to possibly identify option trades that significantly deviate from a stock’s typical volume or open interest. These occurrences highlight atypical trading patterns in the options market, such as a major spike in volume, large blocks of options bought at specific strike prices, or activity that deviates from historical norms.

UOA trades can sometimes indicate traders or investors are expecting a major move in the underlying stock, up or down, and are positioning themselves ahead of an anticipated market-moving event. This could be possible earnings news (beat or a miss), major products announcements, clinical drug trials, major contract awards, or management news (CEO hire or fire).

From a bullish standpoint, a sudden spike in call option buying might suggest expectations of a stock price increase due to the aforementioned events. A surge in a particular put option buying might imply expectations for a stock price decrease or selloff.

There are a number of key signs and filters you can look for and use when scanning for unusual options activity. The first is high volume relative to open interest. In other words, you want to look for a particular option that traded 50,000 contracts (which is five million shares now under control) in a session versus open interest of 100 contracts, or less.

If the open interest is high, traders often look for volume that day that is five or 10 times higher. For example, if open interest is already at 1,000 contracts and volume for the session tops 10,000 – that is a candidate for unusual options activity.

Teva Pharmaceuticals (TEVA) is a recent example where traders are expecting major price movement by early June as there was heavy action on May 21st in the June 17.50 and June 19 calls that expire on June 6th.

Volume approached 75,000 and over 87,000 in the two aforementioned options and is suggesting traders are expecting a pop towards $20. Volume in the TEVA June 18 calls that expire on June 6th nearly tripped 3,000 on Friday and is still showing traders are buying near-term call options.

Other signs of UOA can include large premium trades where institutions are putting millions into one strike price and sweeps, where you see orders that aggressively filled across multiple exchanges. This can signal urgency.

If there is high volume in deep out-of-the-money options from the current stock price, this can indicate unusual options activity as traders are betting on speculative moves. Implied volatility spikes can also suggest traders are expecting a big move over the near-term, and sometimes longer-term.

It is also important to note that not all UOA is directional, some can be hedges and why it is important to do further research. This could include technical and fundamental analysis.

Aside from directional bets on unusual options activity, traders often use credit spreads and straddles or strangles. If doing a credit spread, you will want to analyze whether UOA points to near-term or long-term conviction and construct bull call spreads or bear put spreads, accordingly.

Straddles or strangles are basically hedges where you buy both a call and put option. This will provide protection, or a profit, if a trader is uncertain of the direction and is just anticipating a very large stock increase, or decrease, of at least double-digits.

With any strategy, there are no guaranteed outcomes from following unusual options activity and it doesn’t always lead to an expected stock breakout or breakdown.