Options Flow Play in DKS

As traders, we are always trying to determine what direction a stock will move using all sorts of technical chart patterns and indicators, fundamentals, news and sometimes even the tides and size and position of the moon. With all of our analysis we’re left with the reality that the market, and any individual stock, will do whatever it wants to regardless of what our research says it should do.

The smart money, like hedge funds and institutions, are doing their own analysis using the best information and brainpower that money can buy.  And the smart money usually has the power to impact the movement of most stocks or indexes, at least in the short term.

Wouldn’t it be great if we could see exactly what trades the smart money is making in real time so that we could follow them?

Believe it or not, we can do exactly that using options flow.

Without getting into the technical details, options flow represents all of the options trades in a particular stock or index. Every trade, with all of its relevant information, is recorded by the exchange and is immediately made publicly available. There are tools available that scan all of the trades and highlight those that are large enough to be assumed to have been made by smart money players.

There are a lot of nuances in reading options flow and you need a good amount of experience and intelligence to read, and act on it, correctly. But to put it simply, if you see a call buy worth $5,000, it’s probably being placed by a retail trader. But if it’s a call buy worth $500,000, there’s a high probability that the smart money is behind the trade.

The application that I personally use to follow options flow is Blackboxstocks, where the screenshots in this post are from.

The Trade

As you can see from the screenshot below, at around 9:52 on 8/31, someone bought around $240,000 worth of DKS calls with a 118 strike price expiring on 9/15. They started by paying $1.88 per contract and drove the price up as they continued buying at $2 and $2.04.

Retail traders like us don’t buy $240k worth of calls. This trade was clearly made by a smart money trader who was aggressive in buying his position. There’s no way to know why he (or she) decided to buy at this particular time, and the truth is, it doesn’t really matter. All we should care about is that someone who knows way more than we do just bought a quarter of a million dollars of relatively short term call options on DKS.

I followed the smart money options flow and bought some of the 9/15 118 call contracts at $2.23 each.

The spot price of DKS stock was at around 17 when the buying occurred, so the stock was already moving up with some momentum. The call buying added fuel to the fire, helping push the stock even further. Check out the chart below and see how DKS took off to hit a high of 18.80 at around 10:24am, before starting to pulling back.

I decided not to wait and find out whether the pullback would continue or bounce, and sold my calls at around 10:25am for $2.75 per contract, a 23% profit. Not bad for a half hour trade.

DKS continued to pull back to around 116.50, when I wrote this post. It might continue lower or bounce. The call buyer does not seem to have exited the position, so I’m going to continue watching DKS and will consider getting back into the trade.

Conclusion

This is just one example of how to use options flow to follow the smart money into trades. Just remember, the smart money doesn’t always get it right, so there’s certainly no guarantee that following smart money trades will work out.

Also, there’s no way to know what the intention of the smart money is behind any trade or how much they are willing to risk to know if they are right or not.

So following options flow is still highly risky, but it is an excellent addition to our trading toolkit to use to gain an edge in our trading.