I categorize some trades as “Order Flow Reading,” a strategy I use to follow the biggest hedge funds or traders into their trades. Often the big traders place very large bets based on insider information that average investors don’t have access to.
Let’s take a look at an example. A trade was made in insurance company MBIA (MBI) not too long ago. A large trader accumulated 50,000 August 13/16 call spreads when the stock was trading at 9.
Today, MBI shares are up more than 40% to 14 following a report in The Wall Street Journal that the insurer has settled a dispute with Bank of America and that the bank has taken a 5% stake in MBIA.
Lucky guess by that large trader or inside information? You decide.
More on Order Flow Reading
May 8, 2013
I just finished reading a very interesting study from Ophir Gottlieb, the creator of a professional trading tool name Livevol, regarding option volumes in takeover stocks.
The basic takeaway from his study is that the use of options to garner financial gains through the use of private/insider information is a legitimate phenomenon. Basically, people are cheating, and their tool to do so is options.
For the study, Livevol took a look at the top 100 takeovers from January 1, 2012 to August 2012, then compared the average option volume for the six-months prior to the takeover to the volume five days before the event.
Their results were very interesting:
Average call volume six months prior to deal 1,313 calls
Average call volume five days prior to deal 2,239 calls
Difference 71%
So the call option volume increased 71% between six months prior to the deal and five days prior to the deal—a good illustration of why I occasionally recommend “Order Flow Reading” trades.
Here are the four “Order Flow Reading” trades I’ve recommended so far:
SD April 5 Put 34% profit
UAL April 29/27 Bear Put Spread - 57% profit
HUN August 20/23 Bull Call Spread - 5% loss at current prices
EEM June 42.5 Put - 50% loss at current prices
So far, we have solid profits on the two trades that we have closed completely. EEM is not yet working, though we have a great deal of time left.
After I wrote about the unusual trading volume in MBI on Monday, some readers asked why we didn’t participate in the trade. I explained that I use several scans to look for unusual option volumes; these scans alert me to 5–20 such occurrences every day, and I evaluate the risk and reward in following each trade. In the case of MBI, I didn’t like the odds of MBI rallying 40-50%, so I didn’t recommend the trade.
More on Order Flow ReadingOctober 23, 2013
Occasionally, readers ask me how I determine if I like a trade or not. So today I thought I would show you an example of how I look at a potential order flow reading trade.
In the last week, my scanner picked up on a constant buyer of the Fortinet (FTNT) November 22/24 Bull Call Spread (which means buying the November 22 Calls and selling the November 24 Calls). At this point, it appears that there have been approximately 22,000 of these spreads bought for approximately $0.60.
This kind of large trading definitely piques my interest and I debated whether to follow into this trade. Ultimately, I decided to pass.
Fortinet is due to report earnings tonight after the close—but that’s not necessarily the reason I’m going to pass.
These are my reasons:
• The stock would need to rally more than 10% to break even on this trade at expiration. Though it’s possible, I don’t love the odds.
• I’m starting to sense a change in sentiment on technology and momentum stocks, which could limit this stock’s upside.
I could be making a huge mistake by passing on this trade, but I have to stay true to my system and wait for just the right setups.
I do this exercise hundreds of times a day as I search for opportunities. As we continue to succeed on order flow reading trades, I expect to offer more of them in the future.