Lance Ippolito on Options Trading

Unusual options activity is a frequent occurrence in the trading world. However, finding it requires using some tools to help sieve through the hundreds of options trades with unusual volumes down to the few useful ones. 

Although unusual trading options are rewarding, only some know what to do when it happens in the trading sphere. Those who need more knowledge wind up losing a chance to benefit and make a profit at the time. 

Hence, Lance Ippolito, a trading specialist, will explain the fundamentals of unusual options activity in this interview to assist novice and seasoned traders in participating whenever the opportunity arises.

What triggers unusual options activity?

It is often observed when large transaction volumes relative to open interest, sweeps, and recurring buying lead to anomalies in the flow of options orders. For example, hedge funds and institutions routinely incite unusual options activities to position themselves ahead of anticipated news releases, such as an impending acquisition or bankruptcy that might not have been made public in the financial markets.

What tool does a trader need to scan and filter for unusual options activity?

Lance Ippolito: Options unusual activity can be easily spotted using appropriate market scanners, like InsiderFinance, TrendSpider, Market Chameleon, Black Box Stocks, Benzinga Pro, and Optionsonar. While the first steps in the process can be done with such tools, getting details about the suitable unusual options to trade is slightly more complicated.

Since traders must filter the results from hundreds of options trades with unusual volume down to the few relevant cases, there is a need for more personal analytic skills to complement the efforts of the scanners.

What criteria should the trader consider while carrying out such a scan?

Lance Ipplolito: When trying to scan for relevant unusual options, there are a couple of things that will help narrow down the search. One criterion to consider is looking out for trades whose volume is greater than the open interest. Traders should also disregard actual size and concentrate on transactions whose relative size is more significant than five times what it typically is.

Additionally, traders should be on the lookout for a significant increase in implied volatility as it is one of the unique signs of an unusual option that would be profitable.

Which one of the above criteria is the most important and why?

Lance Ippolito: The most relevant criterion is to opt for relative size and ignore the actual size. Consider 1,000 contracts exchanged in a $MSFT option as an illustration. Although it may seem like a lot, Microsoft trades far more than that every day so that it could be better. In contrast, the same 1,000 contracts would be more significant if traded on a less popular brand.

Are there any special tips for traders to help them successfully trade unusual options?

Lance Ippolito: Options trading unusual options can be split into three, setup, execution, and management. When setting up, traders should check the news for relevant financial info and analyze past UOA flow.

In the case of performance, traders should implement suitable position sizes and adjust for fills. The latter, which is management, involves setting up stops to prevent overwhelming losses.