Hello,
Each day I watch over 2,000 trades for option trades I consider to be ‘out of the ordinary,’ or order blocks I have dubbed as ‘unusual options activity.’
Why do I do this, and why do I believe it works so well?
Hedge funds, banks, and other institutions have access to extensive resources and personnel not available to ordinary traders. These included extensively backtested models and teams of quantitative research analysts who are each paid hundreds of thousands of dollars per year for their work. All of these methods are legal, and earn hedge fund managers and clients billions of dollars each year.
Other ‘toxic’ hedge funds rely on less orthodox methods to generate ‘alpha,’ ranging from unethical to outright illegal trading. These methods can include market manipulation, or even trading based of non-public, insider information. Once a Wall Street titan, the SEC levied a record $1.2 billion fine against Steve Cohen’s SAC Capital for insider trading. In a similarly high profile case, Galleon Group manager Raj Rajatnam was fined $150 million and sentenced to 11 years in prison following an insider trading conviction, forcing the fund to close its doors.
The SEC takes insider trading seriously for the very same reason I take unusual options activity seriously: because it works.
The is, however, one key difference: trading based on options order floor, or ‘unusual options activity, is 100% legal.
This is because once an order is placed, it becomes public information. This means it is totally legal for anyone to trade based off this order, even if one is doing so because he believes the person behind the trade has insider information.
When a trader buys $5 million of options that can potentially expire worthless, I believe there is often a strong chance he knows something. To determine when this is a trade worthy of allocating my capital, I’ve developed a specific trading plan for Unusual Options Activity: the OCRRBTT
O open interest
C chart
R risk
R reward
B break- even
T time
T target
Watch the video below to see and hear as I describe this strategy in greater detail:
Enjoy, and talk to you soon!
Andrew Keene ‘AXK’
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