Part 2: Unusual Options Volume & Other Clues in - The Stock Replacement Covered Call Strategy For Investment Stock Options

“Follow in the footsteps of elephants..”

What do we mean by this?

When an investment stock options option volume and implied volatility increase significantly, it is often a harbinger of things to come. Although the investment stock options price action may seem quiet and uneventful, not reflecting any unusual activity, the investment stock options option activity can be telling a very different story.

An unusual and greater than normal increase in the investment stock options option volume or implied volatility can be an indication that large, informed ‘smart money’ players (the elephants) are placing bets on upcoming events or announcements. These announcements can often have a significant impact on the price of the underlying investment stock options, as with important corporate earnings, or other news.

These “smart money” traders or “insiders” who have privileged information will try to act on these investment stock options before it becomes public knowledge. The trading of investment stock options allows these “well informed investors” to increase their leverage and enables them to maximize their gains without risking their identity.

So how can we, as retail investors, benefit from this knowledge?

A significant increase or abnormal fluctuation in the trading volume of a stock’s options and/or a substantial increase in the daily implied volatility of the stock’s options can be a precursor of a major movement of the respective underlying investment stock options.

Sudden changes in options volume and implied volatility can be a tip off to potentially explosive moves in individual investment stock options. A move of great magnitude is almost always going to be fueled by news, but correct analysis of option order flow can alert one before the news is disseminated to the public.

Often this type of news strikes hard at the heart of a company’s future prospects for growth and profitability.

Examples of these types of news are the following:

1. Earnings substantially better or worse than Wall Street expectations
2. New product developments or breakthroughs
3. Mergers and acquisitions
4. Upgrades/Downgrades coverage by Wall Street Analysts
5. Media coverage
6. Products waiting for FDA approval or in clinical trials

And fairly often, this type of news is leaked. The people and organizations that know about this information will use it to their advantage. By looking for this unusual option order flow, traders can spot unique opportunities in investment stock options and bank big profits just by ‘following in the footsteps of elephants.’

There is more to this strategy than we will get into here, like making sure that there is not also abnormal options size on the opposite call / put options (usually just indicates hedging), but it still can be a very effective ‘clue’ to be aware of.

Since wagers are based on irregular movements in respective companies, this strategy’s performance is not dependent on interest rate stability, favorable investment stock options market environment or any other market factor. This may present major profit opportunities, and returns can sometimes be far superior when compared to other strategies to profit from investment stock options.

Conclusion: this trading strategy analyzes investment stock options data for the purpose of identifying significant increases (or abnormal fluctuations) in trading volume and volatility of the stock’s options as an indicator of movement and the timeliness of that movement in the underlying security. Options order flow analysis can be an indicator of “smart money” positioning, prior to publication of significant business announcements.

Another clue traders can look for, when trying to profit from investment stock options, are ‘block trades’ on the TOS (Time of Sales) reports. This is a related strategy, and does not necessarily indicate ‘insider’ buying, but can alert the astute trader to large institutional blocks of options being bought on either side of the underlying investment stock options.

For example, if the average investment stock options trade size on a particular stock’s options is 5, 10, or 20 contracts, and you suddenly see large blocks of 200, 500 or 1000 contracts going into the close, then this is sometimes noteworthy and worth paying attention to the underlying investment stock options.