Unlocking Insights: How to Spot Different Types of Options Activity with TradingFlow
This is the TradingFlow Team, and this article will focus on options or equities, guiding you through the rationale behind compelling trades and demonstrating how to effectively utilize TradingFlow tools.
While the options market may seem complex, it is also quite fascinating. Unlike buying stocks and waiting for a rise or fall, options contracts offer multiple directions for trading and can be combined like building blocks.
In this article, we will introduce four trading types for options, and explain the practical application of positions through two recent cases of unusually volatile stocks captured by our Team.
（Source: Midjourney）
The Four Basic types of Options Activity
In the options trading market, the elements of rise, fall, buy, and sell can be combined to create four trading types:
Buy a call option: Investors who buy call options have the right to purchase the underlying asset at a pre-agreed price (strike price) on the option's expiration date.
Sell a call option: Investors who sell call options are obligated to sell the underlying asset at a pre-agreed price (strike price) on the option's expiration date.
Buy a put option: Investors who buy put options have the right to sell the underlying asset at a pre-agreed price (strike price) on the option's expiration date.
Sell a put option: Investors who sell put options are obligated to purchase the underlying asset at a pre-agreed price (strike price) on the option's expiration date.
In options trading, to explore more market implications of a transaction, it is often combined with "to open" or "to close" positions. Therefore, the above four trading types can be simplified into two categories:
· Buying Options Contracts
Buy to open
Buy to close
· Selling Options Contracts
Sell to open
Sell to close
"Buy to open" refers to investors purchasing a new position for themselves, where this new position can be either a call or a put. When investors are ready to sell (or close) the position they bought, they will "sell to close".
"Sell to open" refers to investors opening a new short position. To close the "sell to open" position, they would need to "buy to close".
The details of an options trade are crucial and can be challenging to navigate. In previous articles by the TradingFlow Team, there have been signals captured through identifying large opening trades.
Read more: What to Learn from Shorting Tesla Stock Amidst Its Decline?
How to Identify the Type of Options Activity?
The buying and selling of options are determined by whether the option trade occurs at the ask or bid side. If the option trade is initiated by the buyer, they will match the trade with the ask price on the order book. Similarly, sellers will match trades with the bid price on the order book.
However, to determine whether it is an opening or closing position, it is done by comparing the open interest (oi) of the option chain on the following day with the open interest of the current day. If the open interest of the option chain increases, it indicates an opening position; conversely, if it decreases, it indicates a closing position.
To assist traders in more accurately determining the movements of the Smart Money, TradingFlow has launched a new feature. In the "Option Chain Analysis" data panel, it combines Option Flow with open interest boards, adding reference elements for determining option trading operations. The example below shows the data related to Tesla ($TSLA) as of 3rd April:
On 28th March, there was an overwhelming volume of trades executed at the bid side. The updated open interest (oi) data on the following trading day showed a sharp increase. Thus, we can speculate that the trades executed at the bid side were likely "sell to open" positions.
Here are two options trading cases. Let's take a look at how signals of stock market movements are accurately captured!
Case Study 1: Nikola ($NKLA)
· Buy to Close Case
Electric vehicle stock Nikola has seen a continuous uptrend over the past two weeks, with its stock price nearly doubling. As the stock price surged, the options trading volume for $NKLA also increased significantly.
Even before the start of the $NKLA uptrend, there was notable attention on the unusual options trading volume (see the chart below). On 14th March, there was an anomaly in $NKLA Call options with an expiration date of 19th April and a strike price of $1, where the trading volume significantly exceeded the daily average. However, judging from the steep decline in the open interest (OI) value, this is most likely a "buy to close" operation. In other words, an investor likely closed out the previous sell call position before the substantial rise in $NKLA.
Case Study 2: Vistagen Therapeutics $VTGN
· Buy to Open Case
Biotech company Vistagen Therapeutics $VTGN, after experiencing a washout period starting from August 2023 for about three months, began accumulating at the bottom and started to rise after a brief trial. On 28th March, there was an unusual movement in $VTGN's market, with the stock price rising after the opening bell. The increase reached over 20% at one point, before settling down to 15.5% by the close of trading.
Before the rapid rise in $VTGN, there was already a bullish positioning from 15th March to 20th March. Combining this with the changes in open interest (OI) data, we can observe significant unusual buying of Call options on 19th March and 20th March. The transactions categorized as MID on 15th March could also potentially be trades executed at the ASK side.
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Disclaimer: This article is for informational purposes only and does not constitute investment advice. Before making any financial investment decisions, please ensure you thoroughly understand all aspects of the information and conduct your own research.
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