A beginner's guide to unusual options activity - what is options flow?

Learn what options flow is, how to read unusual options activity, and understand sweeps, block trades, volume, premium, and market sentiment with this beginner-friendly guide.

What Is Options Flow? Suppose you are observing a stock that has been trading steadily over several days, and suddenly a large volume of options contracts are traded at a single strike, with the total premium involved being considerably higher than usual. The first thing you might ask yourself is "Who is carrying out these transactions and what information do they have?" This question forms the basis of options flow analysis. By options flow is meant the series of options trades that have been executed and the various details that traders can look at in connection with those trades, such as the contract itself, the strike price, the expiration date, the size, the premium, the execution price, and other features. Furthermore, current flow tools are capable of categorising types of activity like sweeps and blocks in order to assist traders in spotting the transactions which warrant further investigation. The key point is that options flow shows what took place in the options market , not necessarily the reason behind it. Although a big call transaction might appear to be bullish, it could in fact be part of a spread, a covered call, a hedge, a roll, or some other strategy. Similarly, a large put transaction does not mean that someone is definitely making a bearish bet. Since options markets are employed for speculation, for generating income, for hedging, for portfolio management, and for transferring risk, nothing about a single transaction can ever tell the whole story. That is the reason why experienced traders regard options flow as a source of market intelligence rather than as a kind of crystal ball . Their aim is not to simply copy a big transaction, but to use the flow to spot unusual activity, to look into the underlying stock, to understand the possible positions held, and to decide whether the information supports their overall trading thesis. This distinction is particularly important for beginners since the main error in options flow trading is mistaking an interesting trade for a guaranteed signal. Options Flow vs. Normal Options Activity Normal options activity takes place every trading day, and in the case of heavily traded stocks and indexes, thousands of contracts can be traded without anything particularly unusual occurring. In contrast, unusual options activity means trading that is distinct when compared to the usual behaviour of a stock, a contract, or a market. Present options-flow resources usually assess a number of factors, including relative volume, open interest, premium, execution characteristics, and order structure, to detect unusual activity. For instance, a figure of 5,000 contracts may not seem very large when you realise that the same contract is normally traded in tens of thousands each day. Conversely, 2,000 contracts in a contract that is usually quiet would be highly unusual. Context is important here since the number alone is only one part of the story. What Is Unusual Options Activity? Unusual options activi