Can You Profit from Unusual Option Activity?

12/19/2013 6:00 am EST

Focus: OPTIONS

Andrew Keene

President and CEO, AlphaShark Trading

Former floor trader Andrew Keene uses unusual options activity to find trading opportunities, which he thinks can be a valuable tool for many traders.

SPEAKER:  My guest today is Andrew Keene and he is an expert at talking about unusual options activity and how to find good trades around that.  Andrew, what are you looking at when you talk about unusual options activity? 

ANDREW KEENE:  Yes, this is kind of a trick of the trade from the trading floor.  I traded on the floor for over a decade and it is basically the same thing. I am watching institutional order flow.  I am watching the proprietary scan and rework that shows 2000 trades throughout the course of the day.  There are 8700 publically traded stocks and 32 of them have options, so I am watching to see what big institutional order flow is putting their money on.  If they are buying out of the money calls, it is kind of like a red flag to me or a light bulb goes off and maybe I want to put it into a bullish position. I combine that with a trading plan and making sure the chart looks all right.  I want to trade options that are speculative.  These options are traded through one of two reasons, a hedge or speculation.  If I want to trade speculative that is the hedge funds they are taking. 

SPEAKER:  These options, is it a matter of just high volume more than normal or something else as well?

ANDREW KEENE:  the way it works is every single stock has options.  The stocks that do have options, they trade a certain amount of options in the day, so Bank of America, let's say, trades 100,000 options in a day, if it traded 1 million options that day it would be 10.0 times the usual volume.  A stock like ZZZ might trade 200 options and if 2000 of those trades, then it is 10 times the usual volume.  Every stock is specific.  Just because a 10,000 lot of Bank of America, I think that is like a normal order, but a 10,000 lot in a stock that is a little bit more peculiar and you have never heard of, those have been my best trades consistently throughout the years. 

SPEAKER:  These can be actually just one person putting on a hedge of some sort.  Do you want to see a lot of different institutional type buying or is one order enough to attract your attention?

ANDREW KEENE:  My favorite thing is let's say the call is being bought and is now in a bullish market right now.  Calls being bought on the offer, one big size 5000 lot, I do not want to see 300 lots, 17 different times.  I want to see one 5000 lot order, I want to see them pay through the offer and that shows more conviction, a bullish chart and maybe something in the news as well and that is usually my best trades. 

SPEAKER:  How will you trade this?  Will you buy that same thing?

ANDREW KEENE:  Usually I do it the exact same month, depending on the stock and depending on the chart. I  employ every option strategy so I can sell some put spreads, buy-call spreads, buy-call butterflies, buy-calls outright, so I am going to play everything from option 101, which is basic buy in calls and buy-puts or I can make a little money from more complex made by a calendar spread, so I do employ every options strategy.

SPEAKER:  Give us your website address if somebody wants to find out more.

ANDREW KEENE;  Keene on the Market.com.  K-E-E-N-E on the Market.com.

SPEAKER:  Thanks for your time.

ANDREW KEENE:  Thank you. 

SPEAKER:  You are watching the Money Show.com Video Network. 

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