There are hundreds of different methods traders use to find stocks that they think might be in play on any given day. Traders look for gaps higher or lower, relative weakness or strength, and follow a number of other metrics and scans to look for good trades.
MY FAVORITE
In my personal experience none of these methods work as well as unusual option activity. I base 90 percent of my trades on unusual option activity. I define unusual option activity as any equity option block trade that takes place above a stock’s 22 day average option volume.
I use software that scans every trade made across every exchange all day long. I follow the tape very closely, watching over 2,000 trades in a single day looking for the best 4-6 setups. Why do I follow unusual option activity?
EXTRA INSIGHTS
Unusual option activity gives me a window into the positions that large institutional players are initiating. Hedge funds, mutual funds and big banks have capital, technological resources and information that I don’t have access to so when they are initiating a large position I want to know what it is. Following this activity can give traders a huge advantage.
Although unusual option activity is hands down my favorite way to find trade setups it can at time be deceiving. Remember that the majority of market participants are long the market, so a huge put buyer might not be speculating on downside, but rather hedging long stock. Learning how to read the tape and pick out the best trades can take quite a long time to master, but with practice a trader can learn how to decipher this wealth of valuable information.
