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Option Pit

Using Order flow to Trade OptionsFor Direction

Today We Will Cover

• What does using “order flow” mean• What type of order flow is important• Setting up ways to identify interesting trades• What moves the needle• Look at the price and volatility movement• Setting up time frame and gamma• Making the trade

What Is Order Flow?

• Essentially just the buying and selling of options on any given day but…– Filter out the junk– Use the open interest change wisely– No Ex-Dividend plays

Filter Out The Junk

The key to separating good order flow is context

Filter Down to The Trade

The key to separating good order flow is context

When Does Open Interest Matter?

When Does Open Interest Matter?

Simple Ex-Dividend

All of the dividend action happens the Day before Ex-D. Note the Ex-d date on the SPY.

Large ITM volume will be on March 14th.

IGNORE IT!

Understand the product cycle

What Type of Order Flow Is Important?

• Option Buyers- buying smart or stupid stuff

• Option Sellers- aggressive OTM trading

• Writers versus Common- big buy writers like the more stable stocks

Using OptionVision and LiveVol

What Moves The Needle?

Using volatility and option volume

What Moves The Curve?

The skew before The skew after- .5 vol. point flatter

Going through some methodology for the Option Pit blog

Compare Price & Volume Movement

• Is there option movement with no price movement?

• Is there price movement with the option movement?

Did The Volume Cause A Ripple?

Set-Up The Time Frame & Gamma.

• For our example the time frame was mid-April possibly on the after effects of some news

• From a Gamma point of view, the realized volatility was trading above implied volatility

Keep Some Volatility Perspective

Allocation and Trade Gen

• Just because the customer trades one option does not mean YOU have to trade the same one

• Go to the other strikes and see if a trade with a bit more edge can be found

• Allocate a portion of normal size

Generating A Trade Idea

• The XLF skew getting flatter made the call spread more interesting

• Since the customer is buying the 18.5 calls, sell those and look to buy something against it

• The trade ended up getting long XLF Apr 18/18.5 calls spread for .23

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