Insider's guide: how to trade unusual options activity

Dive into our unusual options activity trading strategy and discover how you can learn to follow the “Smart Money”.

Chris Bishop & Justin Nugent

This article was last updated on 05/17/2023.

How to Find Unusual Options Activity

As an options trader, you have many different options for finding trade ideas. There’s fundamental research, technical analysis, and order flow analysis. And inside each of these categories, there are dozens of different trading strategies you can choose from. But the one method for finding trade ideas that has stood the test of time, in our experience, is unusual options activity.

Unusual options activity is how we “Follow the Smart Money” in our trades. When Wall Street moves into (or out of) a stock, the smaller options market is often the first place it’s noticeable. Options are leveraged instruments that give equity traders the right (but not the obligation) to buy or sell a stock at a specific price on a specific date. By looking at options activity, we can see the footprints of how the “Smart Money” (institutional investors, hedge funds, and potentially even insider traders) are moving before the rest of the market does.

This insider’s guide will show you how you can identify, screen, and trade unusual options activity — just like Jon NajarianPete Najarian, and our team of analysts at Market Rebellion. First, we’ll define what makes options activity “unusual”. Then, we’ll reveal why we use this trading strategy and how you too can find and screen trade ideas. Finally, we’ll give you a sneak peek at our unusual options activity trade alerts and connect you with additional resources to learn more.

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What is Unusual Options Activity?

Unusual options activity is an order flow strategy. It looks at where options (calls or puts) are being bought, primarily compared against historic or “normal” levels.

In the options market, that’s a trade that stands out so much you can’t help but notice it; a trade — or, more frequently, a series of trades — with essentially no reasonable explanation other than someone must know the stock price is going in one direction or the other.

In simple terms, you are looking for a trade that makes you say “hmmm… that’s weird”. In even simpler terms, you’re looking for a polar bear walking on a beach.

Insiders offer one easy explanation for the source of unusual options activity. The dirty secret on Wall Street is that often news leaks, of an earnings report, upgrades or downgrades, drug trials, or other major, market-moving news, in advance of the news becoming public. And when news leaks, there are some greedy insiders who try to take advantage.

But there’s another explanation for the “Smart Money” in unusual options activity: Wall Street hedge funds, pension funds, and other big money traders amassing huge positions. These positions ultimately move stock prices in big ways, but the cause and effect may not be immediate.

When trying to add (or remove) a big position, these Wall Street firms will use all the tools available to them: listed exchanges, dark pool trading, and options markets. Their goal is to be inconspicuous. And to do that, they have to try to mask their activity.

However, options markets are still relatively small. Because of the inherent leverage that it offers, the ripples of “Smart Money” behavior are more easily seen by looking at options order flow than looking at trading in the stock market.

As individual traders, we focus on capitalizing while these big funds are still amassing their market-moving position.


Why We Trade Using Unusual Options Activity

Trading based on unusual options activity works to align our positions with those of Wall Street’s “Smart Money,” those with insider knowledge of upcoming news or important information that can move the price of a stock.

Can is the operative word. It doesn’t mean that the stock price will move. Unusual options activity is not a full-proof method for trading stocks. Those do not exist. The market is too big and too humbling for us to expect that. Instead, it’s a way of trying to tilt the odds in our favor; a way of setting up a portfolio of trades with a goal of a positive return.

So, you may ask, why do we want to follow “Smart Money?”

Remember, “Smart Money” traders could be company insiders trading on inside information or institutional traders building large positions. In general, it’s traders or investors with a lot of resources and — critically — information that we don’t have as individuals.

The beauty of this strategy is that it doesn’t really matter to us who the trader is or what the potential catalyst could be. Whether that “something” is an upcoming acquisition or news on a successful (or unsuccessful) drug trial, it doesn’t matter. All that matters is that they might know something we don’t know and that “something” is expected to move the price of the stock — in a big way. And that is information that we act on.

Learn more:

Searching for a better way to trade options? Our Heat Seeker® algorithm can make all the difference when trading unusual options activity.

Here’s a glimpse at Market Rebellion’s unique approach to trading the UOA strategy: Our Unusual Options Activity Philosophy Explained

How to Find Unusual Options Activity Trade Ideas

If you’re looking to trade UOA, you came to the right place. We pioneered a formula for identifying unusual options activity.

To trade unusual options activity, you have to get to the heart of what exactly makes a trade unusual. During decades of trading this activity, Jon and Pete Najarian have honed their strategy, automating much of what they learned into a proprietary Heat Seeker® algorithm that scans the order flow at all of the options exchanges.

There are a number of ways that a trade can be unusual: option trading volume, open interest, the date of expiration, the strike price, and the price paid.

Let’s examine these factors:

  • Volume: Volume is the number of trades over a given time period — commonly measured over a single trading day. This can be any combination of opening trades and closing trades. It is simply a measure of how many times a given security exchanged hands.
  • Open interest: Open interest is the number of contracts outstanding in the market. In effect, it is a gauge of interest in the contract at any point in time. If the open interest is 1, that means that there is one long contract AND one short contract. If the open interest is 100, that means that—across the whole market—there are 100 long contracts and 100 short contracts. Unlike volume which is measured in real-time, open interest is measured once a day at the end of the day.
  • Expiration date: All option contracts have expiration dates. This is the date by which an option either has to be exercised or the contract is void.
  • Strike price: The price at which an option allows the holder to buy (calls) or sell (puts) the underlying stock is called the strike price. For any given expiration date, there can be any number of strike prices — which are either in-the-money or out-of-the-money relative to the price at which the stock is trading.
  • Price paid: The price paid is how much the option buyer paid for the option. Like stocks, options have two prices: a bid and an ask. The bid represents the price at which someone is willing to openly buy the option. The ask represents the price at which someone is willing to openly sell the option.

All of this information is publicly available as reported when trades happen. Some sites have compiled free screeners that use a one-factor model to present unusual options activity. Many popular ones typically look at the ratio of volume to open interest in a particular option. 

These can be a good place to start, but are often cluttered with a lot of noise, like hedges and multi-legged option strategies, that can lead you astray. That means if you’re planning on trading unusual options activity, you need to make sure you’re looking at the whole picture by applying additional filters.

Learn more:

Market Rebellion has unusual options activity trading services designed for a wide range of experience levels.

Check out trade ideas from our UOA lineup: Exploring Unusual Options Activity Trade Ideas

Ready to trade? Try Unusual Option Activity Essential. Learn how you can follow the “Smart Money” with a fresh UOA trade idea each week – including technical levels so that you know where to enter and exit!

How to Screen for Unusual Options Activity

It’s really in how these multiple factors come together that qualifies an options trade as truly unusual.

For example, we like to see high options volume relative to open interest. Let’s say that we see 10,000 put options are purchased versus open interest of 250 contracts. Besides the fact that the volume is high, the fact that bearish sentiment dramatically exceeds open interest tells us without a doubt that the trade is an opening order. That means someone is making an unusually big bet (1,000,000 share equivalent) in the direction of the price.

Now, imagine that those 10,000 put options were bought far out-of-the-money. That means, not only are they putting a lot on the line to make a bearish bet — they’re predicting that the move will be big

Let’s add one more ingredient: what if those 10,000 out-of-the-money put options were expiring next week? That sense of urgency says, “we think this is going to happen fast.”

In other words, the trade example above depicts volume, volatility, and velocity — three of Jon & Pete’s favorite metrics for deciphering the complex moves of the market.

Below is a chart mapping the likelihood that flagged activity will trigger an unusual options activity trade idea based on the factors that we use as inputs in the unusual options activity scanner.

Looking at it this way makes the “perfect” unusual options activity trade profile a little more obvious. If a trade is a large notional dollar amount, traded on the offer, with high options volume that exceeds open interest, well out-of-the-money, and a small likelihood of the price naturally reaching there as it relates to implied volatility, then that trade is certainly unusual. In other words, the trade clearly doesn’t make sense. Why would someone seemingly “throw away” a large amount of money?

However, most unusual options activity alerts don’t neatly check all of the boxes on the above list. That’s where experience and added research come into play.

For example, around some major news events, the implied volatility measure may prove less important. The market may be expecting a large move. If there is about to be a phase 3 drug trial announcement, it wouldn’t be unusual to see implied volatility very high. 

That doesn’t mean that if there was large call buying activity well out-of-the-money, it wouldn’t flag as unusual. It might. Remember, we’re looking for activity that “Smart Money” traders are making. And these are exactly the times (ahead of major market events) that they may be active.

On the opposite side, it doesn’t mean that a large trade executed on the offer with a close expiration date is unusual. There are other factors that could make it less unusual. If that order appears paired with a stock transaction, for instance, it could be a hedging transaction. There’s nothing wrong with that; it’s just not unusual options activity.

These nuances, like determining the difference between a hedge and an outright directional bet, are why those free, single-factor scanners pale in comparison to the Heat Seeker® algorithm and Market Rebellion’s team of options experts.

Learn more:

MILLIONS of options contracts are traded every day in the US. So, how exactly do you pinpoint unusual options activity amid such volume and noise?

Click here for our 3 keys to identifying potential unusual options activity in any market. 

What Are Examples of Unusual Options Activity

Every day, Market Rebellion’s Heat Seeker® algorithm flags dozens of potential trades. This doesn’t mean that all of these trades are actionable. It just means that they passed the first test.

From there, we filter even further with a mixture of the criteria above. Let’s take a look at a few recent examples.

Unusual options activity in Zendesk 1 day before buyout

This is a perfect example of how powerful unusual options activity can be. On June 23rd, 2022, a trader picked up 2,300 far out-of-the-money $70-strike call options in Zendesk (ZEN) expiring in less than a month. This volume was far higher than the open interest — meaning this position was a new opening trade.

The very next day it was announced that Zendesk was getting bought out for $77.50 per share — making the $70-strike call options bought the day prior conspicuously well timed and well targeted. 

Shares of ZEN shot up 50% on the news, and these options contracts (originally bought for between $0.70 and $0.75) would go on to trade as high as $5.80 per contract. 

Whether this trade in ZEN was made by an insider who knew about the acquisition ahead of its press release, or by an institutional trader with access to powerful research tools that we as individual retail traders can’t use, the point is the same: monitoring unusual options activity is the only way to get inside the minds (and wallets) of the Wall Street elite. 

But this isn’t the only time that a massive, out-of-the-blue option trade seemed to foreshadow an acquisition…

Elon Musk offers to buy Twitter

You’re probably familiar with this first example from the first half of 2022. Starting in March 2022, we began identifying unusual call buying in social media giant Twitter (TWTR).

At the time, Twitter’s share price had been cut in half from its $80 all-time high reached in February of 2021. With the stock trading for roughly $38, these traders were betting on a BIG, outsized move to the upside in just a few months—by purchasing short-dated call options more than $5 out-of-the-money.

Then, on April 4th, renowned Tesla (TSLA) CEO Elon Musk disclosed that he had acquired a 9.2% stake in the company. By April 14th, Musk stunned everyone by making an offer to buy the remaining shares of TWTR at $54.20 apiece. But it didn’t take nearly as long for those call options to skyrocket.

The initial announcement from Elon caused Twitter’s stock to rally from roughly $39 per share to a high of over $54 in just 3 trading sessions. Meaning those cheap calls that were previously trading far out-of-the-money had appreciated by hundreds of dollars in a matter of days.

ATVI gets bought out by MSFT

When we first saw this unusual options activity in Activision (ATVI), the gaming giant was in a deep decline. The stock had fallen more than 25% in just six weeks prior to this purchase — but this big buyer of 6,000 out-of-the-money February calls (bought as part of a spread) wasn’t deterred.

Whoever this was, they sure did make a lucky guess. Not only did they nail the bottom in this high-volatility name — they got in just weeks before Microsoft (MSFT) would announce that they were planning to acquire ATVI for $95 per share.

That announcement caused shares of Activision to soar by 26%. But that was nothing compared to these call options, which gained 11-times their value immediately following the event.

GLUU gets bought by Electronic Arts

Here’s an example from back in February 2021. Starting in November 2020, we noticed that  Gluu Mobile Inc. (GLUU) was starting to heat up. GLUU is a stock that often flies under the radar of most traders — so when we saw these colossal back-to-back option trades, we flagged it immediately for its highly bullish sentiment.

The orange dots indicate what we call “unusual” unusual options activity. This activity is particularly ripe for trade ideas.

How’d that play out? On February 8, it was announced that Electronic Arts (EA) was buying GLUU for $12.50 a share, a nice premium over the $10 call options that were initially purchased.

We spotted Tilray before it surged.

Starting in 2021, our Heat Seeker® algorithm spotted consistent activity in Tilray (TLRY), one of the leading marijuana stocks.

With the stock trading below $9, there was buying of at-the-money calls. The stock rose, and more and more unusual options activity appeared. Ultimately, the stock kept surging from the $9 price point to above $60, before its price eventually fell back to earth.

Want unusual option activity trade ideas delivered to you every day? 

Access daily UOA with trade ideas filtered by our pro analysts — former market makers Ryan Mastro & Wayne Razzi. Check out Unusual Option Activity Pro.

Unusual Options Activity Trade Alerts

Market Rebellion specializes in unusual options activity trade ideas. Jon and Pete Najarian have traded UOA for more than 30 years—from when they were on the floor of the Chicago Board Options Exchange (CBOE) to today. 

This strategy has survived the death of the trading floor and migration to electronic trading, the rise of high-frequency trading, the popularity of ETFs and passive investing, and every other major change for the past three decades. It has weathered the test of time and continues to perform as a reliable indication of where the “Smart Money” is investing.

If you are interested in trade ideas or alerts triggered by unusual options activity, here are some questions that you may want to consider before choosing a trade alert service:

1. What are the filters that the options activity goes through before it is presented as a trade idea?

As mentioned above, trading unusual options activity based on one criterion (e.g., volume of the trade is greater than open interest) is too simple. True, that is a necessary condition of unusual options activity, but it’s not sufficient to trade off of the order flow. Instead, understand the process by which trade ideas are chosen from the potential unusual options activity.

2. Is there a methodology for controlling risk in the trade?

At Market Rebellion, our unusual options activity trades are all centered around the idea of controlling risk, with a firm understanding of the fundamentals and mechanics of options trading. What’s that mean in practice? When we present a trade idea, we don’t just regurgitate the trade that triggered the alert. We think about how the trade will perform as the price of the stock moves and time decay sets in.

One example, we frequently buy higher delta calls or puts than the triggering trade (or may even put them on as a vertical spread instead of an outright call/put purchase). Yes, that means we pay more than if we bought out-of-the-money options, but it also means that we lower the amount of potential profitability. We’re giving up the possibility of home run trades in exchange for what we hope are more doubles and triples. And that’s an exchange we are happy to make.

3. Can you commit to a portfolio of trades?

If you are interested in unusual options activity because of exponential gains from front-running potential news, that’s normal. But, you should also realize that this is still a probability-based analysis. The market can (and will) do what the market wants. A company may release great news and have the stock price barely budge… or even go down. In order to get the most from UOA order flow, you have to understand that this is a percentage game. One or two results are not indicative of the power of this strategy over the long term.

Start Trading

Everyone is looking for an edge in the market. However, unusual options activity isn’t a magic bullet. It takes analysis and work, and then proper position sizing and management. It’s more challenging than just viewing where big money flows are going. But when done properly, it can be a powerful tool for your portfolio.

Think you’re ready to get started trading unusual options activity? Explore each tier of Market Rebellion’s unusual options activity memberships:

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