Unusual Options Activity Master Course

Presented byAndrew Keene

Past performance is not indicative of future results.

Day trading, short term trading, options trading, and futures trading are extremely risky undertakings. They generally are not appropriate for someone with limited capital, little or no trading experience, and/ or a low tolerance for risk. Never execute a trade unless you can afford to and are prepared to lose your entire investment. All trading operations involve serious risks, and you can lose your entire investment. No trades are recommendations or advice and can not get sued for losses of capital. All trades are for educational purposes only. People contact your broker or RAI for execution, merger, and other capital requirements. Everyone watching presentation adheres to ALL disclaimers on www.optionhacker.com and www.keeneonthemarket.com

RISK DISCLAIMER

The Master Course

The Unsusual Options Activity Master Course is designed to teach our live trading room members, other active traders, members of the trading community and anyone interested in becoming faster, more consistent, and more profitable in their options trading .

We watch a scanner called TradeAlert and OptionHacker. This software tracks over 1,200 trades daily across all equity options exhanges. OptionHacker gives the best potential Bullish and Bearish Signals Daily.

These block orders are executed by the biggest Institutions, hedge funds, banks and traders in the market.

Why Trade Unusual Options Activity?

These trades that hit the tape are public orders and the information can be used to trade. Why does a retail trader care about these orders?

Institutional traders have better access to: • Information• Capital• Technology• Manpower

Lets look at what these orders might look like…

Four Types of Option Orders

That’s a lot of information to process right? For a professionsaa trader it can be daunting to read, for a novice it can be impossible. To understand what is happening on the tape we have to understand what the basic orders are.

• A trader buys calls• A trader sells calls • A trader buys puts • A trader sells puts

That seems simple enough, but is it really that easy to understand?

Is that Trade Bullish or Bearish?

While even simple orders seem easy enough to interpret they cannot be taken at face value. Calls being bought is not always bullish, puts being bought is not always bearish.

• A trader buys calls = Only bullish 70% of the time • A trader sells calls = Bullish 50% of the time, bearish 50% of the time• A trader buys puts = Actually bullish more often than bearish. 65% of the time

its bullish• A trader sells puts = Bullish 80% of the time, but can be neutral as well.

Understanding Terminology

Past performance is not indicative of future results.

Different Terms

Outright contracts aren't the only types of trades that will hit the tape in a given day.

On the next few slides we will focus on Spreads but some other types of orders are: • Ex-Dividend Plays• Buy-writes• Sweeps• Opening Positions • Cancelled Trades

Ex-Div Trades are NOT UOA.

Ex-Dividend Trade: Remember that call buyers do not receive the dividend, while owners of do receive the dividend payment.

Market makers will run a strategy know as a dividend capture play where they inflate volume in order to take advantage of less sophisticated traders. This cause blocks of deep ITM calls to hit the tape in SIZE

These types of orders should generally be IGNORED.

What is a Buy-Write?

Buy-Write: Technically a buy-write is an options trade against stock at a ratio of 1:1.

Example: A trader sells 1,000 XYZ Jan 100 calls for $2.00, labeled as a buy-write.

This is something that complicates the process of reading UOA. We can never determine a traders underlying stock position and when an order is labeled buy-write we know it may not be speculation.

We want to trade with speculative orders!

I LOVE the Word: “Sweep”

Sweeps: This is an aggressive order. These orders are routed to different exchanges to buy or sell as many contracts as possible.

Sweeps allow for a trader to fill large orders at once without having to clear smaller bids or offers first.

Opening Positions are Great Trades

OPENING: This is the type of trade I want to follow.

• Every opening position should be labeled as so but they aren't always.

• Brokers can be lazy or forget to do this but there is a way to tell if a position is opening or not that we will talk about.

Cancelled Trades can be Tricky

Cancelled: If both parties decide they want to bust a trade they can.

This can be frustrating because if I entered a position based on earlier UOA and they subsequently cancel the trade I need to get out at whatever price the contact is at.

Be careful, often times they are not busting the trade but simply cancelling then adjusting the size or price.

What is a Spread?

Past performance is not indicative of future results.

What Makes a Spread a Spread?

Spreads: A large number of spreads hit the tape in a given day.

There are many different types of spreads so a trader needs to know what they are so they can better understand what it is paper might be trying to do.

An order labeled as a SPREAD can be an option trading against another option or against a stock position. Sometimes it is easy to tell what the spread is. Sometimes it can be more difficult.

Deep ITM Calls or Puts are NOT UOA

There are many different spread types that we see trading in a given day. Some can be useful information and some can be completely disregarded.

Reversal Conversions: A common merger arbitrage play where a trader is trying to get long/short sythetic stock and long/short stock.

Example: With stock XYZ at $100A trader buys the Jan 120 Puts for $22.00 and sells the Jan 120 Calls for $0.20

This is not a speculative play and should be ignored.

I want BIG Speculative Bets

Call and Put Spreads: Vertical spreads have lower risk than outright call and put positions. This means that the trader could have a lower level of conviction.

• If a trader expected a PARABOLIC move in stock they would not trade spreads.

Example: A trader buys 1,000 AAPL Jan 105 Calls to sell 1,000 Jan 110 Calls for $1.35 net debit• A bullish signal• Not as bullish as buying Jan 105 calls outright. • Can still be useful information in thinly traded stocks.

Spreads

Risk Reversals: This is a spread where a trader is buying calls to sell puts or selling puts to buy calls. A trader can also sell call or put spreads agains each other.

These trades are equivalent to sythentic long or short stock and carries a high level of risk.

Example: >> 6250 HAL Oct14 75.0 Calls $1.38 BIDSIDE ARCA 14:01:47 IV=22.1% +0.3 AMEX 1230 x $1.38 - $1.46 x 773 AMEX SPREAD / OPENING Vole=6270, Delta=28%, Impact=175k/$12.1m, Vega=$87k HAL=69.32, OI=1136 >> 6250 HAL Oct14 65.0 Puts $1.86 BIDSIDE ARCA 14:01:47 IV=24.4% +0.8 AMEX 302 x $1.84 - $1.91 x 1157 AMEX SPREAD / OPENING Vol=6255, Delta=-29%, Impact=183k/$12.7m, Vega=$79k HAL=69.32, OI=1789 >> 5000 HAL Oct14 70.0 Calls $3.30 ASKSIDE ARCA 14:01:47 IV=23.5% +1.2 AMEX 1744 x $3.15 - $3.30 x 1312 AMEX SPREAD Vol=5379, Delta=50%,

Spreads

Rolls: This is when a trader is selling a position they were long in the front month to re-establish the position in a further out expiration.

There are 2 types of rolls: Rolling a winning position- This trader was profitable and still believes the stock will move in his directionRolling a losing position- We call this “degenerate paper,” this trader lost money on the front month and is doubling down in the back month. We don’t follow this type of order flow.

Rolling a winning position: >> 7004 BUD Sep14 125 Calls $1.15 Above Ask! PHLX 10:08:21 IV=19.6% +0.8 CBOE 221 x $0.90 - $1.10 x 26 AMEX OPENING Vol=7004, Delta=20%, Impact=138k/$15.9m, Vega=$109k BUD=114.56, OI=267 >> 1250 BUD Sep14 115 Calls $4.10 MIDMKT PHLX 10:08:16 IV=19.0% -0.3 AMEX 197 x $4.00 - $4.20 x 15 ARCA SPREAD Vol=2500, Delta=51%, Impact=64k/$7.28m, Vega=$28k BUD=114.56, OI=4371

Spreads

Calendar Spreads: One of the more difficult positions for a retail trader to take profitably. Can sometimes be mistaken for a roll but calendars are different.

Example: SUNE stock is trading at $21.00

Against 0 open interest on both strikes a trader buys the SUNE Oct 22 calls and sells the Aug 22 Calls.

I want to avoid non directional speculation like this.

That’s a Lot of Information…

So now that we know how to read ANY order that might hit the tape its time for us to breakdown how we find the ones that actually matter to us.

Know how to sift through the noise of the tape will help a trader increase their speed, understanding, and overall profitability when trading.

I have been trading Unusual options activity for 12 years and I still see stocks hitting the tape that I don’t know.

There are 8,700 publically traded stocks and 4,200 stocks with options. I’ve probably traded 2,000.

Unusual Activity

• Having guidelines for what constitutes “Unusual” activity helps filter out noise and gets you into the best possible trades.

• Remember that thousands of trades hit the tape everyday with a few hundred worth paying attention to and maybe 5 or 6 that actually present good setups.

Unusual orders:- Orders at a multiple over average daily option volume.

- These orders are the ones that we want to look at. Size of the trade is not the only factor.

What would be considered more “unusual?”- A buy of 10,000 Options in a stock that trades 80,000 options in a day- A buy of 1,500 Options in a stock that trades 500 options in a day.

Using Past Experiences

When I see a trade come across the tape the first question I ask myself is…

• Have I traded this stock before?• Have I made money in it?

Easy questions, If I have traded a stock on UOA in the past and made money in it, I will trade it again.Examples of stocks I don’t trade:LGF, IMAX, GNCExamples of stocks I do trade: HA, DAL, AAL

Some Things to Think About

• Remember that UOA is not a magic bullet. I can never know a traders underlying stock position.

• My goal is to always look for speculative orders rather than hedges.

• I want to trade the same position as paper, the hedge fund is the one with all of the advantages. I don’t want to try and tweak the trade any.

How to Read Unusual Option Activity Example

Time Stamp

Trade SizeSymbol

ExpirationStrike

TypePrice Traded

Implied Vol@ the Time

Exchange & Bid Ask@ the time

Opening orClosing Position Where stock was trading when the option

tradehappened

Bought or Sold*Red Sold Green Bought

Recent Examples Of UOA

This trade hit the tape on June 3rd early in the trading session. Does this meet our UOA requirements?

This trade also took place at 6.5 times multiple over usual volume. This made it an interesting set up and I took the trade.

Recent Examples Of UOA

1. ENTRY to Open and filled: I bought 30 $PL June 60 Calls for $1.35, 4 Targets: $1.50 and up every $.20, Confidence: 3

This was the entry that I announced after the trade hit OptionHacker.

That same night a higher bid came in for the company. PL stock GAPPED higher on the open the next morning.

Recent Examples Of UOA

Look at the exit I was able to take that morning.

EXIT to Close and filled: I sold ALL 30 lot of $PL June 60 Calls for $9.30, paid $1.35 yesterday, OUT of $PL

On $4,050 worth of risk I was able to profit $24,433

This is a textbook case of UOA. It is widely believed that there is options activity like this ahead of at least 25% of M&A and other deal activity.

Recent Examples Of UOA

This trade hit the OptionHacker on June 6th with only 23 minutes until the Friday close. This is a very large bet for a weekly option, especially ahead of the weekend, where the trader will be short theta over the weekend.

This trade looked like maybe this trader believed there would be some kind of announcement over the weekend in GMCR.

Here's what I did: 6. ENTRY to Open and filled: I bought 50 $GMCR Next Week 120 Calls for $.27

Sure enough, moments later, take over rumors begin circulating. Look at the chart…

Stock RAGES into the close on the rumor that there will be some kind of deal activity over the weekend. Did this trader know something before he bought calls? Doesn’t really matter to me.

Let’s see how I was able to take profits.

Recent Examples Of UOA

Here are the exits I was able to take:

14. EXIT to Close and filled: I sold 10 of 50 $GMCR 6.13.2014 120 Calls for $.36, paid $.27

15. EXIT to Close and filled: I sold 20 $GMCR 6.13.2014 120 Calls for $1.30 paid $.27

16. EXIT to Close and filled: I sold 5 more $GMCR Next Week 120 Calls for $2.00, paid $.27

17. EXIT to Close and filled: I sold ALL 5 lot of $GMCR 120 Calls for $3.10

The Unsusal Options Activity Trading Plan

Those are some great trades, but how did I know how to get in them?

I follow a trading plan. This is a plan that I have developed over a 12 year long career as an equity options trader. I call it the OCRRBTT Trading Plan

OCRRBTT Trading PlanO: Options Volume vs. Open interestC : ChartR: RiskR: RewardB: BreakevenT: TimeT: Target

Each of these components is important in its own right.

O: Options Volume Vs. Open Interest• This is a simple concept, I want to take trades where I know the trader is

initiating an opening position.

• When volume is greater than open interest I know that it is an opening position.

• This is an OPENING, SWEEP, and NOT a SPREAD

Notice how volume is greater than open interest, even if this trade wasn’t labeled as opening I would know it was

O: Options Volume Vs. Open Interest• We don’t want to be trading with closing orders. We want to get in when

they get in, not when they get out.

MSG 60.38 Big block trade in Madison Square Garden. The stock is up 23 cents to $60.05 and an investor sells 14,700 Nov 60 calls on MSG at $4.20 per contract. The contracts saw noteworthy opening activity on May 2 for $1.45 and $1.50 when shares traded for $51.70. [$60.05 +0.23, IV=22.2% -0.0]

C: Chart

Chart: While I never used charts on the trading floor they have become a big part of my trading plan now.

The main indicator I use is the Ichimoku Cloud, it a simple to use forward looking technical indicator. I have a simple set of rules for beginner traders to use.

No long positions under the cloud

No short positions under the cloud

NO TRADE when stock is in the cloud

A New Part of the Trading Plan

Before we get into the rest of the plan I’d like to talk about two more parts of the plan that I have added. The acronyms for these parts of the plan are O and V. So now lets think of the new trading plan as the OCOVRRBTT trading plan.

O: Open interest across all expirations

V: Average daily stock volume

These are two new components that I have added to the trading plan that greatly increase the probability of success.

O: Open Interest Across All Expirations

I can also notice WHERE the open interest is. If it is mostly ITM then I know that it is more likely traders in this stock know what they are doing.

If it is OTM then I know that a trader has either been wrong about this stock or they have been shorting stock against their call position. Here I’m less likely to take a trade.

V: Average Stock Volume

This is the most important new addition to the trading plan.

I know always compare the options volume to the average daily stock volume for a number of reasons. Consider this situation in NI.

A trader buys 11,000 NI Calls and the stock only trades 900,000 shares in a day on average

There are two things to consider.

• If the options control more than 1 days worth of stock volume it shows very high levels of conviction

R: Risk

Risk: I can actually calculate risk two different ways. Risk is one of the most important concepts in any type of trading plan.

Ways to measure risk: Dollar amount- what is the total amount of money I can lose. Percentage of Book: What is the largest percentage of my book I am willing to lose in this trade

R: Risk

Notice that no single position can ever blow out my account. I always have a percentage of my book in Cash and it is usually around 30-70%. I have blown-out before and it is no fun at all.

R: Reward

Reward: When do I want to take profits in a trade?

Every trade and every trader is different but generally I have targets based on option expiration.

B: Breakeven

Breakeven: It is important to always know where my breakeven is in any trade.

• Generally if target 2 is hit I will move my “stop” to breakeven.

• One of the hardest things to do in trading is to exit a losing position.

T: Time

Time: Most traders lose money because they don’t give trades enough time.

To combat this I have one simple rule.

Buy the same strike and expiration as paper

Although nearer term options may be cheaper I Want to trade the same expiration as paper.

T: Target

Target: I have my targets in place by need to consider what to do when those targets aren’t hit.

Generally speaking if target #1 isn’t hit within a week of holding the position I will exit the trade.

The Quantity of the Trade isnt Always Important

A trader buys 80,000 TWTR Sep 50 Calls for $.85 1.5 times usual volume

A trader buys 1,000 PL June 30 Calls for $1.00 6.5 times usual volume

While the TWTR order is clearly the largest position we are more concerned with the multiple over usual volume. Obviously their PL trade ended up being a much more profitable trade.

Again, remember to consider the stock that the activity is in.

Other Tips and Tricks

There are some other things a trader should consider when trading UOA. These points are based on the experience I have had trading options.

Stocks that Gap: Often times after a stock gaps higher a trader will sell their long stock position and buy calls. This is actually less bullish that it may seem. The trader is actually REDUCING their overall exposure to the name.

Chasing trades: I have often lost money chasing trades that there was no need to chase. Remember how we talked about the number of trades that hit the tape in a day? There will always be another one.

When Should a Trader Day/Swing Trade?

- Day Trade: There are certain signals that we believe create a better opportunity to take as a day trade and profits within hours if not minutes.

- Swing Trade: There are certain signals that we believe create a better opportunity to take as a swing trade that profits over weeks if not days.

When to Day Trade Equity Options

• Only with weekly or front month options that trade in pennies. (Options market is

$.87-$.90)

• The goal is to make money in hours and not hold these positions overnight.

• Take advantage of these SIGNALS and can try and “scalp” them.

• It is very hard to day trading options that are nickel wide. (Options market is $.85-

$.95)

Rule #1 Day Trading Options

Rule #1: Only implement this plan in options that trade in pennies.

• Trader should have 4 targets.

• Trader’s Stop will be 20% lower. If a trader pays $1.00, the stop is $0.80, if a trader pays

$3.00 the stop will be at $2.40.

• If trader’s stop on a $1.00 option is $0.20 lower their targets should be 10% profits,

20% profits, 30% profits and 50% profits. After target #2 is hit less aggressive trader

can move their stop to breakeven.

• The less stock that trades in a day the more risk/reward there is.

Rule #2 Day Trading Options

Rule #2: Do not trade any signals labeled as “spreads”

• Spreads can be against other options or tied to stock.

• “OPENING” orders usually produce the best signal.

• A trader must also keep an eye on the 5 minute chart, if the stock breaks the cloud in

the opposite direction or see “rounding tops” a trader may exit early.

When to Swing Trade vs. Day Trade

When a Trader should Swing Trade:

• Trades that are not weeklies or the front month options

• Beginner traders should only take trades where the Ichimoku Cloud agrees with

direction. No call buying under the Cloud, no put buying when stock is above the

Cloud.

• Trader can trade either options or underlying stock.

Swing Trading Options Rules

Rule #1: Setting Targets and Stop Losses.

• With outright options a trader should have 5 targets.

• Trader should have a stop loss at 30% of purchase price of the Option.

• Targets will then be 15%, 30% 50% and 75% and 100%. If a stock gaps overnight,

trader can take off multiple targets

• If a trader is less aggressive, once Target #2 is hit, move stop to breakeven to

guarantee profits.

Many Options with Options

Rule #2: Targets for Spreads

• Trader should sell half of their spread position at a double.

• Trader should hold the rest of their position until expiration.

Example: Trader buys the XYZ Jan 100-105 Call Spreads for $1.10

First target is $2.20

Trader should hold the rest until expiration

More Swing Trade Rules

• Rule #3: Trader can add to losers when swing trading if the chart still lines up.

• Charts are much more important to a trader when they are swing trading.

• Again a trader should always have an eye on the chart looking for rounding tops.

• Any break of the cloud in the wrong direction on the daily can be used as a signal to

exit.

When Use this Plan?

When Does a Trader Use This Plan?

• Any signal that comes across in an option with more than 1 month to expiration.

• When the signal agrees with the direction of the Ichimoku Cloud.

If the stock is breaking the Ichimoku Cloud, that is a stronger Signal.

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During the trading day I dissect this order flow for our customers and look for these big

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