How To Profit From Real-Time Option Flow
Did you know that you can hitch a ride from institutional money flow? It’s like hopping on a bus, and then getting off where YOU need to go, even though the bus just keeps on going. Let’s find out how …
I’ve always been tempted to cheat on tests and look at my smarter friend’s sheet for what I didn’t already know. Don’t worry, my moral obligation, even at age 12, was so strong, that I never could get myself to do it. But, it just so happens that there are instances in my adult life where this type of ‘behind-the-scenes’ knowledge is acceptable. Whoopee!
In trading the market, wouldn’t it be helpful to look at an institutional Smart Money cheat-sheet? Would it be helpful to see where all of the trade volume is going? For example, if someone were to say, dump $500,000 on one single call option, would you say that someone is just throwing away money? Or, could they know something that would cause that option “bet” to make money?
Fortunately, we really don’t need to know. And, maybe it’s better that way. Instead, when we see unusual options activity, what we can do is ‘hitch a ride’ on the momentum, and then get out at or before peak momentum.
This principle is kind of important to mention before we dive into it — insider trading is illegal. You cannot trade based on inside knowledge of what is happening in a company you work for or are in some way affiliated. So, when we use real-time option order flow, the technique I’ll discuss has virtually nothing to do with catalysts or news, but more so, taking advantage of a sudden burst in momentum.
In this article, I will discuss:
- What is Option Order Flow?
- Where do I find real-time Order Flow?
- How can we profit from Order Flow?
- How do we know when to get in and when to get out?
Also, here is a quick video from my YouTube channel highlighting some of the tools I use to evaluate order flow and how it coincides with the price action:
Please note, this is not trade or financial advice. Do not take trade examples mentioned in this article because you will be too late. All trading involves the risk of loss, and in some cases, greater than 100% loss. Do not trade with any funds you are not willing to 100% lose. The information presented is the opinion of the author and is meant as educational. Please do your own research. That said, …
Ready? Let’s DO this!!!
The Smart Money
What is “Smart Money” anyhow? Smart Money refers to where large institutional investors are putting their money. Smart Money uses large option orders called, block trades, sweeps, and dark pools. Many times, institutions will want to enter a position as covertly as possible, so they will either place the orders in different exchanges or use something called dark pools. Now would be a great time to go over some basic terms because we will see these terms later as we look at option flow platforms and how to trade alongside Smart Money.
Call Option — a digital contract that gives the buyer the right to buy shares at a certain strike price, no matter the current stock price. For example, if someone bought 1 Call Option with a strike price of $5 of StockX currently trading at $5. If StockX’s price went to $10 before the expiration of the Call Option, the buyer would have the right to buy the shares at $5, even if the stock price was $10. They could either purchase the shares at $5 then turn around and sell them for $10 and pocket the difference, or simply sell the Option which is now more valuable. Most option traders simply buy and sell the options. Therefore, in general, Call Options rise in value if the stock price increases, or if volatility increases.
Put Option — on the flip-side, a Put Option is a digital contract that gives the buyer the right to sell shares at a certain strike price. From our example above, if someone bought a Put Option on StockX with a strike price of $10. If StockX’ price fell to $5 market price, then the Put Option owner could have the right to still sell their shares at $10. Therefore, Put Options, in general, rise in value if the stock price decreases, or if volatility decreases or if expiration is very near.
Put/Call Ratio (P/C Ratio) — a ratio that tells you the sentiment. If the P/C is above 1.0, that means that there are more Puts than Calls, and the sentiment is “down.” For example, for a given stock, if there are 100 puts but only 50 calls in total, then the P/C ratio would be 2.0 indicating a negative sentiment. If, however, the P/C was 50 puts to 100 calls, then the P/C would be 0.5 and the sentiment would be understood as positive.
Strike Price — categorized as In-The-Money (ITM) or Out-of-The-Money (OTM). ITM options carry the value of the stock price called intrinsic value, plus volatility and time value in lesser degrees. OTM options have less intrinsic value, so respond more to volatility, time value, and importantly, small changes in the stock’s market price. For example, seeing heavy volume of OTM option order flow indicates that institutions believe that a stock’s market price will rise to that level based on some catalyst, market reaction, or momentum.
Expiration — Unlike shares, option contracts have an expiration date. Many have weekly expirations, while some have monthly or quarterly. All things aside, the value of options decreases as it nears expiration.
Spot — the stock’s market price at the moment an option(s) was purchased. For example, if a block of option orders comes in with a strike price of $5 and the spot price is only $3, then one can assume someone knows something that could raise the stock’s price from $3 to $5 or come close doing so.
Block Trade — privately negotiated option orders from an institution meant to be executed separate from public retail trades
Sweep —A type of option order to obtain the best price regardless of offer size. These orders often come in very fast and from multiple exchanges filling the orders. Occasionally, you will see “Repeater” block trades come in sequentially indicating a huge order broken up into smaller orders. So, you might see something like 500 orders of StockX come in, and then another similar order comes in 2 or 3 more times subsequently, possibly from different exchanges. (someone knows something!)
Dark Pool Prints — very large institutional orders whose order details are hidden from public view and are arranged on private exchanges so as not to impact the stock’s price with their orders, nor obtain unfavorable arrangements for their own orders.
Unusual Options Activity — they are, well, just that … unusual for that stock. It could be unusual volume, premium price, OTM orders, or volatility. Typically, it’s unusual volume. For example, if StockX’s trading volume is typically 1,000 contracts every day. Then one day, orders start coming in for 5,000 contracts, then somethin’s up! It is like an alert without having to worry about insider knowledge or a catalyst.
Next, let’s look at a Real-Time Options Order Flow platform to see these terms in action.
InsiderFinance — The Smart Money Cheat Sheet
I’m going to combine the “Where” and “How” to trade real-time order flow, because it will make more sense that way. And then, we’ll finish with some entry/exit tips.
There are several “order flow” websites and they are all very similar. I’ve tried a few, and I’ll have to say I’ve enjoyed InsiderFinance.io the most so far. If you’re interested in going straight to the source of institutional money flow and having the platform actually help you sort through the volume, you can CLICK HERE and enter BLOCKSTOXX10 for a 10% discount on your first payment. They have a user-friendly interface and you are able to display several panes on one page at once. [On some other platforms, you have to open multiple tabs in your browser just to view all the information at once and not all parts of the site are updated in realtime.] On the InsiderFinance dashboard, you can filter, of course, for OTM orders, unusual trades like other platforms. But some unique items I’ve found valuable are their Heat Score, Top Tickers, and Research tools which I will explain in more detail below.
Let’s look at an example where I can point out the different tools and how the InsiderFinance platform was able to alert me to a massive trade opportunity.
The image below is my InsiderFinance dashboard. At the top center, I’ve pointed out the Put/Call Ratio, indicating market sentiment — in this case, bullish as there are less puts than calls.
In the center is what I like to think of the alert section, or what they call Smart Money Insight — this is where the platform assists you in narrowing down the order flow and filtering it for you to highlight unusual options activity. In this example, I have sorted by Unusual Contract Order Size. I’ve also circled QS (Quantumscape) as it popped up on the “Top Tickers” box on the right. It is the Top Tickers where I look first, and then I would want to substantiate the alert with trade volume.
On the bottom left, is the real-time order flow. InsiderFinance has a nice tool called the Heat Index which is an algorithmic calculation of high conviction trades. In my example, I have sorted this list by Heat Index and lo-and-behold, we have high conviction activity on QS as well.
Lastly, I have pointed out a Dark Pools widget on the lower right-hand corner. The right top and bottom widgets can be changed and customized.
Now that QS has got my interest, I want to delve a little deeper into where Smart Money is exactly putting THEIR money — that is, which actual contracts are they banking on.
In the image below, this is the Ticker Research page, indicated from the left menu beaker symbol.
In my example below, I have sorted the QS Realtime Option Flow by Open Interest to show me where the most volume lies. The top 2 on the list were:
- QS 10/15 $34 C with 10,579 OI
- QS 10/15 $30 C with 7,666 OI
What this tells me is that institutional Smart Money thinks that QS will go from where it is trading now, around $27 at the time of this article, to at least $30, maybe even to $34, by or before October 15.
To analyze that further, Smart Money is betting the OI of 10,579 times the price per contract of $73 = a $772,267 bet that QS will go to $34 by October 15. Ummm, that’s a lot of money, folks. I don’t really think institutions would just throw $700 grand in the garbage, do you? Not to mention, all the rest of the orders below that.
Next, we’ll look at the price chart in Think or Swim to substantiate this option activity.
And Away We Go!
In the image above, I’ve got QS pulled up in TOS as of Saturday, September 25, 2021. If you will recall, the unusual QS activity was for the $30 and $34 strikes. Now, if you look at my technical analysis with Fibonacci retracement, we do in fact see resistance levels at about those levels!
What we also see is that a consolidation squeeze has fired on the Daily chart on the right indicating that a burst of upward momentum has already started, and that the squeeze on the Weekly chart on the left has yet to fire, indicating further upward momentum is expected (but not guaranteed). When we see multiple squeezes in multiple time frames, it is called a “Nested Squeeze”, meaning that they will sequentially fire and carry the stock’s price up with periodic bursts of momentum. If you are interested in Options training and the type of custom indicators I use, you can get a discount on these — CLICK HERE for a discount on Options Training and custom indicators! (You can go there on your own, but you will not receive a discount).
And interestingly, what we do not see, is a clear catalyst for this upward “bet.” We don’t need it.
When to Enter/When to Exit
The entry and exit are not as clear because of volatility. I would say that if you see orders like this come in, that it could be an alert to take a similar trade at that moment. You could either take the exact same trade as where the OI lies, or you could place a safer trade by buying ITM options at, say, the delta 70, but that is another story.
In the image above, I’ve dropped down to a smaller time frame, the Hourly. It tells me that QS has entered a consolidation squeeze but has found support at the $27 level. It also shows me that we are nearing seller exhaustion from my Ready-Aim-Fire indicator on the bottom right, alerting me to an increased chance that price/momentum will resume an upward momentum trend once the consolidation squeeze fires.
To exit, you could exit near the resistance levels of either $30 or $34. Remember, we do not want to take the train to the end of the line. We want to hop on and hop off and pocket our snippet of profit from just part of the ride, not the whole ride. The reason is that if the institutions finally dump their position, you will be left holding the bag — better to get out with a small profit than to have to close the trade at a loss. I often set a 20% take profit order. Some platforms like TastyWorks allow you to do that with the click of a button. But for TOS, I just calculate my exit price by hand.
Hop-On and Hop-Off the Smart Money Bus
I think I have only scratched the surface on what order flow can do for people. Platforms like InsiderFinance can really take the guesswork out of Smart Money flow. As I become more familiar with their platform, I will continue to update my review of order flow platforms and the tools that can help you.
And remember, the premise of following Smart Money, is that they might know something and that YOU do not have to. You simply have to see where the unusual activity is and piggyback on their trade momentum. I would say try to take your profits quickly, within the first burst of momentum so that you are not left holding the bag. In subsequent articles, I will go over in more detail buyer and seller exhaustion that can help in pinpointing entries and exits.
Happy Trading!
Please note, this is not trade or financial advice. Do not take trade examples mentions in this article because you will be too late. All trading involves the risk of loss, and in some cases, greater than 100% loss. Do not trade with any funds you are not willing to 100% lose. The information presented is the opinion of the author and is meant as educational. Nothing contained in this website should be construed as investment advice. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit. Please do your own research. This article may contain affiliate links. This means that if you sign up from my referral link, I may receive a reward for the referral.
