I often talk about following the smart money into trades by monitoring options flow. Here’s another example of a trade I took based on the flow.
Trade Entry
On Monday 11/27, the smart money bought over $800k of COF (Capital One) 107 strike call options expiring on 12/15, with the stock trading just above 106.
Here’s a screenshot of the flow from the Blackbox scanner that I use:
The daily chart showed COF breaking out of consolidation, and the general market was looking very bullish, especially for the beaten down and lagging financial sector.
I decided to follow the smart money trade and bought the 107 strike calls at $2.19, almost the same price as the smart money entry.
I also bought some common shares, just to take the time pressure off me, in case the trade took longer than expected to work out.
Trade Exit
Midday on Friday Dec. 1, COF was trading at 115 when I decided to sell my calls at $8.60. The main reason was because 115 was acting as an area of resistance and the S&P was hitting up against 4600, which could also potential serve as an area of significant resistance.
I also peaked at my P&L and felt that I wanted to lock in my profits. In 5 trading days my calls went from 2.19 to 8.60, for just short of a 300% profit. Not bad for week long trade.
I’m still holding my commons to see if the market breaks above 4600, but I’ll be monitoring my position closely and lock in my profits if I see weakness.
https://i0.wp.com/www.analyzethetrade.com/wp-content/uploads/2023/12/Screen-Shot-2023-11-27-at-1.22.56-PM.png?fit=864%2C558&ssl=1558864Arnie Singerhttps://www.analyzethetrade.com/wp-content/uploads/2020/08/trading-Outside-2-3-e1597696268609.pngArnie Singer2023-12-01 18:03:542023-12-01 18:04:28Trade Recap: COF Trade Based on Options Flow
I’ve written a lot about following the Smart Money by watching the volume on price action and the options flow. The options flow can often let you see what the smart money traders are positioning for.
Here’s an example from a trade I recently made based on what I saw in the options flow:
On Nov. 22 WTI crude was trading in the low 70’s, having taken a beating after spiking to the mid 90’s just a few weeks before. Despite the ongoing war in the Middle East, oil traders seem to feel comfortable that the conflict would not spread beyond Gaza and chose to focus on weak economic data coming out of China as well as slowing demand internationally.
Trade Entry
Just minutes after market open, someone bought around $200k worth of call options in COP (Conoco Philips), one of the large integrated energy companies.
The screenshot below, taken from blackboxstocks, shows the short dated call sweeps into the 113, 114, 115 and 118 strikes.
[I was made aware of this options flow by one of the moderators of the blackboxstocks live Discord trading room. @MelStone31]
I decided to follow this options flow and buy some 114 strike calls for $1.74 at 10am, when the stock was trading at 113. The COP longer term chart showed some major support at around 111. So it appeared that some smart money trader was betting on a bounce.
Was this a sure thing? Absolutely NOT. The market does whatever it pleases — anything could happen, especially in stocks that tend to be connected to movements in commodities, like crude. But trading is a game of probabilities, and since the smart money has access to information and research way beyond what I could ever dream of having, I decided to take shot and manage my risk with a stop below support and appropriate position sizing. I also bought some common shares are 113.49, so as not to be confined by the time element inherent options, in the event that I would decide to hold for the longer term.
Trade Exit
COP moved up to around 115 by end of day and then spiked up around a point at open on Nov. 24. I sold my calls at around 10am at an average price of $3.45 for a profit of just under 100%. I got stopped out of my stock position a couple of hours later at 115.85, for a 2% gain. Not too bad for a 2 day trade.
Of course, the smart money could have ended up being wrong and this trade could have turned out to be a loser. But following the smart money based on their options activity put the odds in my favor and gave me an edge that ended up working in my favor.
That slight edge is really all that you can ask for in trading. And you can tryin to get that edge too by following the smart money through their options activity.
https://i0.wp.com/www.analyzethetrade.com/wp-content/uploads/2023/11/Screen-Shot-2023-11-22-at-10.02.13-AM.png?fit=884%2C254&ssl=1254884Arnie Singerhttps://www.analyzethetrade.com/wp-content/uploads/2020/08/trading-Outside-2-3-e1597696268609.pngArnie Singer2023-11-27 16:19:492023-11-27 16:19:49Trade Recap: COP calls based on Options Flow
Many retail traders are super smart and capable when it comes to analyzing macro events that could effect markets as well as company specific data that could potentially move that company’s stock. They can formulate a hypothesis that seems just as sound as that of any top Wall Street analyst. That makes sense, given that all material information is supposed to be public and, therefore, everyone has an equal opportunity to see and utilize all of that information.
If you want to make a long term investment in a stable and liquid stock based on your analysis, you are willing to hold through drawdowns and you set a stop at the level you can admit that you were wrong, then you’ll probably be ok. But if you’re looking to place shorter term trades based on your macro or fundamental analysis, then I think you’re taking a risk similar to a gamble.
The smart money, like institutions, hedge funds, mutual funds and other massive financial entities, move markets. They are the only ones that trade the volume needed to do so. Retail traders are almost always just a tiny blimp on the screen, an annoying pimple to be popped by smart money traders seeking liquidity.
The smart money has teams of the best brain power that money can buy who spend their days and nights analyzing companies and markets. They also have access to information that is way beyond the reach of smaller players and retail investors. They speak directly to top corporate leaders and government officials and get insights and information that might never be published in the media the rest of us read. When news is published, the smart money usually already has that information from the original source, and has acted on it. In some cases the smart money is the one responsible for leaking (or even creating) the story.
For example, when the latest Israel-Hamas war broke out, crude oil spiked as would be expected. Then the questions was, would crude continue to rise, based on the possibility that the conflict would spread to the entire Middle East, particularly to Iran, which is the primary backer of Hamas and Hezbollah. I personally felt, and still feel, based on my knowledge of Israel, that the conflict will spread. So I expressed my analysis by buying shares of USO, the largest and most liquid ETF that tracks crude futures. The smart money did not agree with my analysis. Instead, they focused on weaker China economic numbers and a warmer than normal winter, which translates into lower energy demand and lower oil prices.
The smart money clearly had greater insight into the macro geopolitical military situation than I did. They will ALWAYS have better information, data and insight than us retails traders. So trying to trade based on our own macro and fundamental analysis is basically like trading with no edge at all.
The Only Way to Trade Fundamentals
The only way for retail traders to trade on fundamentals is to rely on the smart money to do their research and make their move first. We can’t compete with the smart money, but there’s nothing stopping us from following them.
The clearest way to follow the smart money is by watching the volume behind the price action in a stock or index. Moves made on large volume indicate that the smart money is behind the move, long or short. Moves made on light volume indicate retail activity or a move by the smart money to fake out retail traders and draw them into taking the opposite side of a position that the smart money wants to take.
Another way retail traders can try to determine what the smart money is doing is to follow the options flow in a particular stock or index. Large direction options flow indicates smart money positioning. While it’s impossible to know the true strategy behind options flow, there are ways to greatly increase your odds of correctly identifying the intention behind the flow.
Looking at a combination of volume and options flow can give retail traders a good shot at guessing what the smart money is doing, and giving them the opportunity to follow them into the trade.
Bottom Line
Macro and fundamental research and analysis is an important component to determining what stocks to trade, but it’s not something that retail traders and investors can do effectively, since the information and data available will always either lag or be deficient compared to the research and data available to the smart money.
The best way to do macro and fundamental research and analysis is to rely on the smart money to do it for you, and then simply follow their trades, by tracking volume and options flow.
https://i0.wp.com/www.analyzethetrade.com/wp-content/uploads/2023/11/detective.jpg?fit=1200%2C800&ssl=18001200Arnie Singerhttps://www.analyzethetrade.com/wp-content/uploads/2020/08/trading-Outside-2-3-e1597696268609.pngArnie Singer2023-11-20 19:13:562023-11-21 18:58:26Can Retail Traders use Macro and Fundamental Analysis to Trade?
When the war between Israel and Hamas began, crude oil prices spiked due to concern that the conflict would spread to effect Iranian oil production and cause supply disruptions in the region. At the time WTI (Western Texas Intermediate) was trading in the low 80’s and then spiked to just below 90 on 10/20. From there the price has dropped to just above 75 today (11/8).
Why has the price of crude dropped so far and fast?
A general demand decline in the US and Western Europe due to a slowing economic climate and a warm winter.
China demand is slowing, based on the latest data released yesterday (11/7).
The Israel-Hamas war is being viewed as a localized conflict that will not spill over to the broader region. As long as Hezbollah, a proxy of Iran, stays out of the conflict, Iranian oil production and exports seem safe.
In my personal opinion, I think there’s a good chance that Hezbollah will attack Israel and the conflict will, regretfully, expand. If that does happen, crude will rip higher.
However, the chart does not seem to agree with me, at least at this time. For the time being, oil looks like it’s either headed even lower or will stabilize and stagnate in the mid 70’s until there is a catalyst to take it higher.
Oil and gas equities such as CVX, XOM, EOG, COP and most others have gone along with crude for the ride down and, although they seem to be at at attractive levels now, it doesn’t look like they’ll be going higher, fast, any time soon.
Of course, everything could change if the war in the Middle East goes regional. But unless that happens, all the economic and technical signs are pointing to crude staying in the 70’s for the near future.
I recently wrote about the sell off in energy related equities, 2 days before the vicious Hamas terror attack against Israel on October 7. The attack, and subsequent Israeli air strikes, caused WTI (Western Texas Intermediate) crude to rise to a short term high of 90 on October 19.
Even though Israel is not a major gas or oil producer or exporter, Iran, the major patron of Hamas and Hezbollah and a major oil exporter, is. Iran is thought to be behind the Hamas attack, and they could be punished for it by increased sanctions or military action. Any military conflict with Iran could disrupt oil exports from the region, including Saudi Arabia and the Gulf states, which would be a significant hit to worldwide supply.
Based on what we’ve just explained about the geopolitical situation triggered by the latest Hamas attack against Israel, it makes sense for crude prices to have spiked. The question now is, why has crude pulled back?
Possible Reasons for Pullback
Here are some possible reasons for the pullback in crude:
Middle East Cool Down
Since Israel has allowed humanitarian supplies into Gaza and Hamas has released a few hostages, some see that as hopeful to a peaceful resolution to the conflict, without an Israeli ground invasion of Gaza.
Weaker Demand
Prices are dropping due to the expectation for weaker demand as a result of the growing recessionary environment. The economic numbers coming out of China have been weak, and hopes of a China recovery have been a major factor in the thesis for higher demand.
Profit Taking
Traders are taking profits before the next move higher.
Analyzing the Reasons for Pullback
Middle East Cool Down
The idea theory that the Hamas-Israel conflict is cooling down and that the Israeli delay in mounting a ground invasion is a sign that there is room for peace is simply WRONG. Israel will invade Gaza to completely destroy Hamas. There’s a high probability that Hezbollah will attack Israel and start a second front. The fighting along the Israel-Lebanon is already escalating.
Iran is the main patron of Hamas and Hezbollah. As the conflict expands, the chances of them getting involved grow exponentially. They will need to be punished, either via sanctions or militarily — or both. While this is tragic for the world, it’s super bullish for oil.
Weaker Demand
Demand might be weakening but the consumer is still, for the most part, strong and employed. And winter is coming. And supply is still constrained. If China does begin to stimulate their economy, demand will climb, as will crude.
Profit Taking
Traders are in the business of making money. And the smart money traders who bought crude in the high 70’s and low 80’s had a nice 10 point gain to enjoy. Nothing wrong with that. Assuming that they agree with my thesis of crude going higher, they will want to buy back their contracts at a lower price. Based on the daily chart, a major support level for WTI is at the 83 level. If it holds there and start to bounce, there’s a good chance the smart money is back in and will ride crude up to 90 and beyond.
As of today (Oct. 25, 2023), WTI bounce at the 83 level and is currently pushing above 84.
How to Play Crude
The oil and gas equities have been lagging crude and primarily been following the S&P, which has sent the equities lower even as crude has gone higher. So even though I think the equities, like COP, CVX, EOG, SLB, will move higher along with crude, their move will probably be tempered by S&P, if the index drops.
The purest way to play crude is with WTI futures. But if futures is not your game, you can trade the ETF USO, which tracks the WTI futures contract.
Bottom Line
My best guess is that the situation in the Middle East will get much hotter very soon, which will drive crude much higher. Buying the USO ETF is a good way to bet on this rise in WTI.
https://www.analyzethetrade.com/wp-content/uploads/2020/08/trading-Outside-2-3-e1597696268609.png00Arnie Singerhttps://www.analyzethetrade.com/wp-content/uploads/2020/08/trading-Outside-2-3-e1597696268609.pngArnie Singer2023-10-25 18:55:302023-10-25 18:56:22Crude is Pulling Back. Is this a Buying Opportunity?
I had Maayan’s bat mitzvah in school today so I didn’t start until after 10am. Then i got into a couple of SPY trades which all didn’t work out.
I want to start trading an 8/89 crossover strategy on the 3min — which seems to keep you out of choppy trades (as opposed to the 1min). I also need to keep in mind where vwap is and momo and flow before entering a trade. But I’m not going to trade without crossover — unless maybe something major is happening which is causing a strong trend day.
I also am going to look at the insurance companies, because they appear to be breaking out. This would be for the fidelity account.
Job numbers came in way higher than expected, which drove futures down. Market has since turned green.
I got into TSLA puts on a break of support. I should have gotten out immediately but I held through several resistance levels and ended up getting stopped out for a big loss. I had 3 contracts.
I bought the puts at just about the low, betting on a break below support. UVXY was also going higher. Then the reversal. I don’t think there was any way to anticipate that. The only thing I could have done is managed my stop level better.
Feeling very unsure — need to focus on managing risk.
Energy names, which are tracked by ETFs XLE, XOP and OIH and include popular names like CVX, XOM, PSX, COP, SLB, EOG (to name just a few), have sold off hard along with Crude Oil (WTI) this past week (9/28 – 10/5). Crude futures hit a high of 93.69 on 9/28 before selling off on heavy volume down to 82.10 on 10/4.
According to this article on oilprice.com, institutional traders were behind the selloff, despite a drop in inventories and the fact that Saudi Arabia and Russia confirmed that they would continue holding back supply to support prices.
While supply remains constrained, along with the onset of winter heating season, the common theory for the selloff is that traders are wary of demand destruction caused by the recession and the continued economic slowdown in China. The weak demand theory makes sense — but why did it suddenly cause traders to sell? Did they not hear about the recession until this week?
The more likely reason behind the selloff is that the Smart Money started accumulating the brunt of their long positions with crude trading in the 60’s and 70’s. At 93, the Smart Money had profits of between 30 and 50 percent — the right time to ring the register and take their winnings.
Analyze the Charts
If you look at this weekly chart of WTI futures (/CL) you can spot a technical reason for the selling at 93, coincides with the 50% fib retracement from the 123.73 high back in June of 2022.
If you look at the hourly chart, notice the heavy volume on the move up to 95, and then on the acceleration down on the break below 90. Then there’s significant buying volume coming in as support at between 82 and 83.
Has crude found support here, or is this just a short covering bounce that will get sold again?
Based on the fib levels on the weekly chart above, it looks like crude could break below 80 and test the 23.6% fib level at around 77.50.
It would appear, therefore, that the path of lease resistance for crude is lower.
What about Energy Equities
The drop in crude is bringing down oil and gas related equities. The equities tend to follow crude, the DOW and the S&P — and they’ve all been heading lower, so it’s not surprising that the energy names are taking such a beating.
Is this selloff going to continue?
Taking a look at a weekly chart of XLE, the ETF that tracks the largest and most popular oil and gas names, we can see that the current selloff is simply a pullback down towards the 89 EMA at around 79. There’s also a large volume area of potential support at around 80. Most of the charts of the equities in the XLE look just like this chart.
What Happens Next?
If I knew what happens next, I clearly would not be spending my time writing this — I’d be mortgaging my house and placing my bet, all in. The market can, and will, do whatever it pleases.
Based on the charts and price action, it looks like the current selloff can continue a bit longer and take crude down to 79-80 and the energy equities down to their respective 89 EMAs. At that point, assuming the supply situation remains tight and demand doesn’t totally shut down, crude and the equities should find support and begin another move up. Remember, the Smart Money sold in the low 90s, so they will probably be ready to buy back in around 80 and ride it back up, this time to 100.
A general market bull run, some positive China demand stimulation or a new geopolitical crisis, can help the bull case in crude and energy stocks. On the other hand, a market dump on bad data releases or Fed speak can push crude and energy stocks through support levels.
Seasonal Performance
One final data point to look at is the seasonal performance of the energy sector.
Notice the peak in June followed by the pullback and then the nearly 50% retracement and then the selloff at the beginning of October. Based on this seasonal chart, we could be getting a push through the end of the year.
Should You Buy or Sell Energy Stocks
I cannot give you buy or sell recommendations. This is just for educational purposes.
Based on the charts we looked at and our analysis, if I already was long energy names (which I am), I would NOT sell here because I think we are close to support and a bounce. I also wouldn’t add to my positions – or start a new position – until I saw crude find support at 79-80 and the XLE at its 89 EMA on the weekly chart. Dong nothing is sometimes the smartest move.
Best of luck in whatever you decide to do!
https://i0.wp.com/www.analyzethetrade.com/wp-content/uploads/2023/10/CL-daily.png?fit=986%2C938&ssl=1938986Arnie Singerhttps://www.analyzethetrade.com/wp-content/uploads/2020/08/trading-Outside-2-3-e1597696268609.pngArnie Singer2023-10-05 19:13:322023-10-05 19:53:36Energy Stocks are Selling Off Hard. Should You Buy or Sell?
An important tool in my trading toolkit is the options flow, which I use to attempt to identify smart money trades that I might want to follow. The ones I noticed this morning (Sept. 19, 2023) were 2 back to back sweeps of weekly 44 strike puts in CVNA. The trader paid around $123k for 1,636 put contracts that expire in a bit over a week, which indicated strong conviction.
Courtesy of Blackboxstocks.com
I decided to follow the trade and bought some puts at 11:07 with the stock trading around 47.60. The stock continued to move lower, even though the overall market was getting a bit of a bounce. I had a large support level at around 46, so at 11:21, with CVNA around 46.15, I sold my puts for a 37% gain. Not bad for 14 minutes of work!
The stock then bounced at 46 up to 47.30, and then turned back down. I’ll continue watching the 46 level, and might get back into puts of it breaks 46 with volume. But when trading short term options, it’s often best to take profits when you have them, especially if the chart tells you to.
The smart money trader is most likely sticking with his puts, and will probably end up winning big. But for small traders, grabbing a piece of the pie and eating it is a lot safer than trying to rob the entire bakery.
https://i0.wp.com/www.analyzethetrade.com/wp-content/uploads/2023/09/cvnput.png?fit=731%2C350&ssl=1350731Arnie Singerhttps://www.analyzethetrade.com/wp-content/uploads/2020/08/trading-Outside-2-3-e1597696268609.pngArnie Singer2023-09-19 15:59:402023-09-19 16:09:39Quick Scalp Following Large Options Flow in CVNA
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.
https://i0.wp.com/www.analyzethetrade.com/wp-content/uploads/2023/08/Screen-Shot-2023-08-31-at-10.20.37-AM.png?fit=1790%2C1072&ssl=110721790Arnie Singerhttps://www.analyzethetrade.com/wp-content/uploads/2020/08/trading-Outside-2-3-e1597696268609.pngArnie Singer2023-08-31 18:11:352023-09-19 16:10:19Options Flow Play in DKS
