From the desk of Steve Strazza @sstrazza
This is one of our favorite bottom-up scans: Follow The Flow. In this note, we simply create a universe of stocks that experienced the most unusual options activity — either bullish or bearish… but NOT both.
We utilize options experts, both internally and through our partnership with The TradeXchange. Then, we dig through the level 2 details and do all the work upfront for our clients. Our goal is to isolate only those options market splashes that represent levered and high-conviction, directional bets.
We also weed out hedging activity and ensure there are no offsetting trades that either neutralize or cap the risk on these unusual options trades. What remains is a list of stocks that large financial institutions are putting big money behind… and they’re doing so for one reason only: because they think the stock is about to move in their direction and make them a pretty penny.
Then we flip through our list of stocks flashing unusual activity and pick the best setups using many of the same technical filters we do for our other scans. Just like that, we’ll follow the money flow and fatten our own pockets along with some of the world’s most powerful financial institutions.
Whether the transaction was executed on the bid or the offer also matters. Which counterparty was the aggressor definitely matters. Without this information, we wouldn’t know whether the trade was a bullish or bearish bet.
For example, a massive amount of put contracts executed at the ask is a bearish bet (all else equal). But did you know that a bunch of these very same puts executed on the bid is actually bullish? In this scenario, the seller is the aggressor as they are shorting the puts, which is similar to buying calls on the ask and betting on higher prices.
But no need to worry about any of this. We’re doing it all for you! All you need to know is that we’ve designed a list of stocks that some of the largest firms on Wall Street feel very bullish or very bearish on. Then we apply our technical analysis to identify asymmetric trade setups to follow them into some of these names.
Due to the nature of the catalysts applied to create this universe of stocks, most of these trades will tend to be on the shorter-term end of the spectrum. We’ll typically be looking to take profits a few months out at most.
But there will be some splashes whereby participants put on “leaps”–or other long-term strategies, which could warrant a longer timeframe.
Either way, after running this scan internally for years now, we’re confident we’ll find some great trade ideas on this list. Better yet, they’ll come from both the long and short sides.
At the end of the day, the idea for this universe based on unusual options activity is to follow the big money into some of their highest-conviction trades and profit along with them.
Of course, as with any stock we’re in… we’ll also have the primary trend at our back.
Here’s this week’s list of stocks with unusual options activity, powered by our friends at The TradeXchange: