Smart Money Tell

Smart Money Tell

By November 26, 2015Markets, Options, Stocks, Trading

Every wish you knew what the big hedge funds and institutions were doing with their money? Who doesn’t?

While it’s not possible to be 100% sure, there are tells that can give clues to what the big money is thinking and/or planning to do in the near future.

It’s well known that the big boys have multiple ways to disguise their intentions as not all of the trades hit the tape for visible inspection. These trades create Dark Pools. These are pockets that lack transparency into who’s making the trades and how big the positions are, which is exactly what the big guys want.

However, they can hide everything they do.

The Tell

In addition to buying stocks, several big traders will also buy options in the options market to futher enchance their position or to get a little more leverage. Unlike the buying stocks, options do not provide any place for the big traders to hide.

The motivation may not be apparent at first glance, but a little financial forensics as to a buy or sell on a particular stock option can be a tell.

Let me explain…

Take stock XYZ. If you look at the options chain on that stock and there is a huge purchase of a particular call option at a certain strikeprice, then this could be a tell that a big player is expecting that stock to make a huge move to the upside.

The same goes for a larger purchase of puts at particular strikeprice.

The reason why big investors are using options include lowering cost and risk while potentially increasing returns. The theory is that smart money would employ an option play if they had a strong opinion on what an individual stock was going to do.

So analyze the unusual option activity of your favorite stock and consider piggybacking on a large investor.

This is not insider information… but information from the inside. Putting money down with the Pro’s so to speak.

Other Things to Consider: 

The unusualness comes in many forms with scales of usefulness.

It may be significant activity to hedge an existing stock position like a covered call to increase returns or puts to place a price floor.

The speculative opening plays are often more valuable when a large option order is unearthed. Comparing new volume to existing open interest is a must. A high dollar cost and large number of contracts demonstrate the conviction of the customers.

A new SIZE buy trade in out of the money options gets inspection as to what does that party know or why is their opinion so strong.

The option followers would believe that those in the know, know and using the public information of Unusual Option Activity is a trading tool not to be ignored.

Alan Knuckman

Author Alan Knuckman

Alan Knuckman is the Founder and Chief Market Strategist for a subscription trading service for his inner circle members. He has over 25 years of market experience that began in the pits of the Chicago Board of Trade as a runner and progressed to a Treasury Bond speculator. Each trading day Alan is the video host of the Morning Market Stir from the CME Group and the Pre Market Pulse on CBOEtv. He is also a frequent financial commentator appearing on television regularly with CNBC, CNN, Bloomberg, and Fox Business Network.

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