How to Use Option Block Trades to Spot Unsupported and Unusual Options

 


Option trading provides investors with a wealth of opportunities, but not all options are created equal. Some options are supported by market conditions, while others are unusual or unsupported. One of the most effective ways to identify such options is by analyzing option block trades. In this blog, we will explore how to use option block trades to spot unsupported and unusual options, helping traders make informed decisions and capitalize on unique market movements.

Understanding Option Block Trades

What Are Option Block Trades?

Option block trades refer to large, high-volume option transactions executed by institutional investors, hedge funds, or high-net-worth individuals. These trades often indicate significant market interest in a particular option, making them valuable indicators for retail traders.

Why Are Option Block Trades Important?

Analyzing option block trades helps traders understand market sentiment, identify potential price movements, and determine whether an option is supported or unusual. Since institutional traders have access to extensive research and insights, following their trades can provide valuable clues about future market trends.

How to Use Option Block Trades to Spot Unsupported Options

1. Identify Large Trades with No Fundamental Support

Unsupported options often arise when large block trades occur without fundamental backing, such as earnings reports, mergers, or macroeconomic events. Traders should watch for large transactions that do not align with market news or trends.

Example:

If a company’s stock has stable fundamentals but sees a sudden large put option trade with no corresponding bad news, it might indicate an unsupported option trade.

2. Look for Divergence Between Price and Volume

When option block trades show a significant increase in volume but no corresponding price movement in the underlying asset, it may indicate an unsupported option. Traders should analyze price trends alongside volume spikes.

Example:

A massive call option trade occurs, but the stock price remains unchanged or declines, suggesting that the trade lacks market confirmation.

3. Monitor Unusual Open Interest Spikes

Open interest reflects the total number of outstanding option contracts. If a block trade causes an unusual increase in open interest without fundamental backing, it may be an unsupported option trade.

Example:

A stock has an average open interest of 10,000 contracts, but overnight it jumps to 100,000 with no news catalyst—this could be an unsupported option.

4. Evaluate Bid-Ask Spread and Market Depth

Unsupported options often have wider bid-ask spreads due to lower liquidity and market maker uncertainty. Observing the spread and order book can help identify questionable trades.

Example:

If an option suddenly has a spread of $2.00 when similar options have spreads of $0.10, it might indicate an unsupported trade.

How to Use Option Block Trades to Spot Unusual Options

1. Track Unusual Volume Surges

Unusual options often exhibit massive volume spikes that stand out from typical trading activity. Identifying these can provide insights into significant market moves before they happen.

Example:

A stock's typical option volume is 5,000 contracts per day, but suddenly, one call option sees 50,000 contracts traded—this is an unusual option trade worth investigating.

2. Analyze Skewed Option Implied Volatility (IV)

Unusual options often experience significant changes in implied volatility. A sudden rise or fall in IV relative to historical levels may signal an unusual trade.

Example:

An option’s IV typically hovers around 25%, but after a block trade, it jumps to 60%, suggesting unusual activity.

3. Check Unusual Strike Price Selection

Large institutional traders typically choose strike prices close to the stock’s current price or key technical levels. If a block trade is placed on a deep in-the-money or deep out-of-the-money option, it may indicate unusual activity.

Example:

A stock is trading at $50, but a trader executes a massive call option trade at a $90 strike price, which is unusual and warrants further investigation.

4. Review Expiration Date Anomalies

Most traders prefer options with expiration dates that align with earnings, economic data releases, or market events. If a block trade targets an unusual expiration, it may be an unusual option trade.

Example:

A company has an earnings report due in three weeks, but a massive trade is placed on an option expiring in one week—this unusual trade might signal insider knowledge.

Tools and Platforms for Tracking Option Block Trades

1. Unusual Options Activity Scanners

Various platforms, such as Unusual Whales, Market Chameleon, and FlowAlgo, track unusual option block trades in real time. Traders can use these to monitor market anomalies.

2. Time & Sales Data

Many brokerage platforms provide time & sales data for options. Analyzing this can help traders identify block trades and assess their impact on market movements.

3. Open Interest and Volume Analysis

Platforms like ThinkorSwim, Interactive Brokers, and OptionStrat offer tools to track open interest changes and volume surges, helping traders identify unusual activity.

Conclusion

Option block trades provide valuable insights into market movements, helping traders identify both unsupported and unusual options. By analyzing volume surges, price divergences, open interest changes, and volatility shifts, traders can spot potential opportunities and risks. Utilizing advanced trading tools and scanners can further enhance decision-making, enabling traders to capitalize on unique market conditions.

Understanding how to use option block trades effectively can be a game-changer in options trading, allowing traders to make informed and strategic decisions based on institutional activity. Whether identifying unsupported trades or uncovering unusual market movements, these strategies can help traders stay ahead of the game.

 

 

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