Options trading alerts can make your trading a lot easier. The way it works is that options flow is monitored and when a predefined criteria is met, an options trading alert is triggered. The options trading alert service I’m talking about is here. But wait! Before you click on this link to check out this service, please finish this options trading lesson so you understand the system.
Options Flow Trading
Looking at individual option chains in individual stocks is a terrible way to try and profit from options. The method that successful options traders use is that they monitor the options flow of all options across the entire market and they move quickly when certain options flow alerts are triggered.
There are a few things you need to know about the options flow. What’s good options flow? What’s bad? What do we follow and what do we not follow? Let’s go over the basics of options flow using the BB scanner tool.
This is what comes across the black box scanner throughout the day:
As these options trades came in, they met the criteria for the algo. For example, check out Twitter $42.50 strike and the spot was $42.86. so it was just barely in the money. Someone bought 250 contracts at $1.52 and that was above the ask (notice the _AA). It was a sweep order and it cost them $38,000 to open the trade. This is real-time options flow. I have seen my options order appear in the Black Box options flow screen above BEFORE even my broker displayed my options order! That’s incredible speed and BB is plugged right into a major exchange that gets options flow in seconds from when the order is placed.
This real-time options order flow comes filtering in throughout the day and it’s telling us a wealth of information about what other traders are doing. That’s what the flow is, it’s real-time options trades that other traders are making and if it meets the algos criteria, it displays in the options alerts tab.
You may be wondering what the colors of the lines mean and the words block or sweep mean.
Block trades are a single large trade executed at one exchange. Sweeps trades are large trades that are broken up and executed across multiple exchanges.
Yellow means that the open interest was exceeded in a single trade. The single block or sweep trade exceeded the day’s open interest.
Purple means that the open interest was exceeded in multiple traded. Multiple blocks or sweep trades have exceeded the day’s open interest.
Options Trading Alerts
The screen grab you saw above was the options flow tab. Here is what the options trading alerts look like:
Options Trading Algorithm
The options trading algorithm kicks out the following alerts: large bullish alert, repeater bullish alert, roulette bullish or bearish alert, steady bullish alert, and swift bullish alert.
The large bullish alert triggers when a yellow call sweep (opening transaction) fills at the Ask and meets the minimum notional amount traded.
The repeater bullish alert triggers when multiple alerts at the same strike price and expiration occur within our allotted time frame.
The roulette bullish or roulette bearish alert triggers when a yellow call sweep (opening transaction) is traded with the current week’s expiration. Please note, these alerts are called roulette alerts because they are highly speculative.
The steady bullish alert triggers when all of our proprietary alert criteria has been met within a 60-minute window.
The swift bullish alert triggers when all of our proprietary alert criteria has been met within a 5-minute window.
Let’s look at the basics of options flow that you’ll see using the BB tool:
Let’s say you were looking to trade this ticker today. Some flow starts coming in. You’re watching it closely. More options flow comes in. We have calls, puts, a block, sweeps, but there’s just nothing consistent about what we see here. If you were trying to trade this ticker off of options flow, there would be no trade. Strikes, expirations, calls, puts, it’s just all over the place.
When you see flow on a ticker that doesn’t tell a story, move on. This flow has no story to tell about what the big money thinks of this ticker. It’s better to move along when you see mixed options flow like this.
Option Strategies With ETFs
We don’t trade options flow strategies with ETFs. Take a look at this options flow on SPY:
You might be tempted to think that someone is preparing for the SPY to drop within the next few weeks. After all, someone just spent over $1.5 million on puts! The problem with that logic is that this could be a hedge. The above flow represents 41,284 contracts of SPY opened. They’re all at the ask, and almost all are sweeps and yellow BUT 41,284 contracts represent 4,128,400 shares. SPY traded over 43,000,000 shares today. While this is $1.5 million at the ask, and most are yellow colored, it is insignificant to what SPY normally trades.
ETFs can be hedges. An institution could be hedging their long position. These contracts can also be small numbers relative to how many underlying shares are traded. These numbers on another ticker may be significant, but on an ETF, this flow doesn’t give us any indication of what someone might be thinking about the direction of SPY.
You must be careful. You can’t assume all calls are bullish and all puts are bearish. Here is what the options flow looks like on bearish calls:
If you are buying a call, that’s bullish because you hope the price of the underlying stock is going to increase but, would you sell that call if you thought the price was going to continue to climb?
Call flow that has a “_BB” on the end of it means that it was traded below the bid. This means (99% of the time) that someone either sold those calls, or wrote the contracts. Both are bearish.
Closing or writing the position means you don’t think the price is going to continue to go higher. For example, if you’re in a call and you believe the price is going to go higher, you wouldn’t sell it. You wouldn’t close that position if you think the price is going higher.
Calls that are being traded below the bid means they’re either closed positions or it’s someone writing the position. You wouldn’t write a call position if you think the price is gonna go up so when you see a bunch of calls it doesn’t mean jump into that trade because there’s a lot of action going on if these are being traded on the bid or below the bid. It’s not 100% of the time, but 99% of the time this is showing us that someone either sold this position or they’re writing the contracts and closing what they already have. Both of these are bearish.
You can’t jump into a trade just because you see a lot of call action. If those calls are being traded below the bid, that means someone else wants to get out of that position.
Many options trading alert services do NOT show you if the trade occurred below the bid. Black Box gives you the upper-hand by showing you this information in the options flow.
There are also bullish puts:
You mean not all puts are bearish? That’s correct. Just like how we can have bearish calls, we can have bullish puts.
If you are buying a put, yes, that’s bearish because you hope the price of the underlying stock is going to decrease. But, would you close that position if you thought the price was going to continue to drop? Put flow that comes in “_BB” means that it was traded below the bid. This means (99% of the time) that someone either sold those puts, or wrote the contracts. Both are bullish scenarios.
Don’t jump into a short position just because you see a lot of put activity. If those puts are being traded below the bid, that means someone wants to get out of that position which is bullish!
Options Trading Alerts Massive Flow
If you want to go long a stock, the best options trading alert flow will look like this:
We call this massive flow. Notice how the flow just kept coming in all day. Throughout the day, buyers were stepping in and pounding the options flow. Someone’s excited about the money that they expect to make in this stock and that’s something we might want to follow as well when it’s just getting pounded all day long. Someone with deep pockets clearly wants to build a position and fast too. Notice the “_AA” above the ask trades!
Other strikes and expirations were hit too. When you see constant flow on a ticker, throughout the entire day, that’s something you want to pay attention to.
Options Trading Alerts Pristine Order Flow
Another great options trading alert is what we call pristine order flow. Pristine order flow looks like this:
This is an example of beautiful options flow and when you see it, you need to pounce on it. Notice how the same strike and the same expiration were just pounded. The buying was relentless. Notice how the price of the contracts started at $0.957 and went to $0.98, $1.10, $1.16, and $1.17. We want to see buyers continuing to step in even as the price goes up!
Someone clearly wants into the stock and they want in now! Price is not much of a factor because time is more important to them. They need to have this stock and they need to have it now!
We should jump into a stock with pristine order flow like this. At the very least you should pull up a chart and find the news catalyst to find out what is going on.
Options Trading Alerts Rapid Fire
Here is what the Rapid Fire options alert looks like:
The Rapid Fire alert is one that comes in extremely fast. Notice the flow above. All that action took place in under two minutes.
This shows an urgency that someone wants to pile into this position fast! When it comes in this quickly, we want to pull up a chart and check the news because something big could be going on.
The Rapid Fire options trading alert is perfect for day traders.
Options Trader Exiting Position
The amazing thing about the Black Box tool is that we can also see when a trader exists an options position.
In the options flow above, we saw flow coming in on M (bottom flow). Notice the top flow and how it shows the same contracts being traded on the bid. This could mean that buyers are flipping out of those contracts. If big money is exiting, we want to know that.
If we follow big money into a position, then we should follow them out of the position as well.
What To Look For With Flow
Time frame: either short time frame or continuously pounded all day long.
Contract price increasing.
A or AA.
Flow without all of the things above can still work out. But the higher probability trades will have all or most of the characteristics listed above. With practice, you will memorize the characteristics above.
That’s the end of this lesson on options flow analysis. We hope you find it helpful and even if you don’t trade options, you can see how valuable of a tool this is even for your long and short equity trades.
The tool and options trading alerts described in this article can be found here. If you find this lesson helpful, please consider signing up to BB using our links. We appreciate your support.