Active Trader Magazine

Trading Strategies

Paper chase: Trading order flow and unusual option activity

By Andrew Keene
Traders have access to a wealth of information — perhaps too much. In addition to the hundreds of sources for fundamental information on publicly traded companies, analysis and trading platforms offer option traders a host of technical tools and indicators. Unfortunately, this ocean of data and technology can overwhelm novice traders and cause them to ignore one of the most reliable indicators at their disposal — order flow.

Learning to "read the tape" was once essential to floor traders, but with the shift to electronic markets it is now a skill few traders develop. Order flow and unusual options activity offer a window into the minds of institutional market participants. And for retail traders, knowing what these players are doing can be a huge advantage.

However, seeing a big block trade appear on the tape and putting on the same position is not a path to success. These orders are not always what they seem, and if you don't know what to look for, you risk misinterpreting a major signal.

A systematic and methodical strategy for dissecting order flow and unusual option activity can help you hone in on the best trades. The first step is to understand the different players in the equity options market.

For the complete article, see the August 2013 issue of Active Trader magazine. Click here to subscribe.

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