Trading, and options trading in particular has gone through some very significant changes over the last 10-15 years. 

Last week we touched on how unusual option activity (UOA) can give us some insights.  Today, I would like to build on this. 

One thing that I have noticed is how fundamental analysis has become less and less important and volume has become more and more important.  Volume and open interest figures have been used to try and gain insights into how various market participants are positioned for years.  But with the advancement of automated/high frequency trading, fundamentals are almost thrown out the door. 

These trading programs simply try to drill down a market level and then attempt to “jab” the order book to see if it can expose a weakness in the order balance.  That’s why UOA can be so valuable. 

This is especially evident in stocks that trade low volume or in an expiration that is not standard, like a weekly.  We know that unbalanced open interest becomes much like a magnet as time to expiration nears.  Why?  Because both parties have “skin in the game.”  The battlefield has been defined.  What a perfect place to point your black box and try to pick off some order flow.  It doesn’t work as well if normal market forces are at work. 

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