Whenever I have big scores in the options market, they’re all found via unusual options activity.
Following hedge funds, institutions and big traders into similar options trades has been my most successful strategy for my 20 years trading options. And while it’s not fair that these hedge funds may have insider information, there is nothing wrong with me following them into trades.
3 Unusual Options Activity Signals
When examining unusual options activity (specifically call buying), I am looking for these signals:
- Big call buying in comparison to normal trading volume
- Large amounts of money put at risk by the call buyer
- Repeated bullish activity day after day.
An Example of Following Unusual Options Activity Straight to the Money
For example, in 2020 when the call buying in GM hit all three of these signals, I sent the following trade alert to my Cabot Options Trader subscribers:
Buy General Motors (GM) March 31 Calls (exp. 3/19/2021) for $4.70 or less
The market is having another wild day of rotation as super-hot growth stocks are getting hit hard, while cyclicals are rallying. And one of those cyclicals that is performing well today is General Motors (GM) which is also attracting call buying. Here are those trades:
Buyer of 2,000 October 31 Call for $1.62 – Stock at 30.15
Buyer of 11,000 September 31 Calls for $1.12 – Stock at 30.5
This also follows several big buys of longer dated calls in the last two weeks, and because the price of GM options are so inexpensive, I am going to add the stock to the portfolio today.
To execute this trade, you need to:
Buy to Open the GM March 31 Call
The most you can lose on this trade is the premium paid, or $470 per call purchased.
Please note, GM is unlikely to rally $20 in the blink of an eye like stocks such as Peloton (PTON) or JD.com (JD). That being said, we may be transitioning into a GM/KO/DOW type of market, which makes this call buy a great risk/reward opportunity.
These large call buys by the trader turned out to be well-timed as GM went on a meteoric run from 30 to as high as 65. And because we bought call options, we also participated in this stock move, locking in a profit of 365% in just six months’ time.
Will following hedge funds and institutions into similar trades work 100% of the time? Without question the answer is no.
However, year after year, my Cabot Options Trader portfolios have soundly outperformed the S&P 500 using this strategy to help find the next hot stocks.
Do you watch unusual options activities? Has it changed how you invest?
*This post has been updated from an original version, published in 2017.