What is Options Flow in Stocks?
What is Options Flow? Order flow is a trading strategy based on observing trades that are made by large corporations such as hedge funds, in order to better determine what may happen to the market. Options flow occurs when the order flow is used for options instead of traditional stocks.
Many people are familiar with what an unfiltered order or options flow might look like, a variety of flashing red and green colors usually seen on the trading floor in a big Hedge Fund on Wall Street.
Red, would indicate bearish trades, while green would indicate bullish trades.
But it would be impossible to analyze all of this information at once. It needs to be filtered down to only relevant, or abnormal trades.
Usually, this is done using software to analyze a variety of different trades that are made in real time and portray them in such a way that they can mean something to the trader.
This can be seen in the image below, which is the live flow on 12 May, 2022, from the options flow system, 'OptionStrat.'
How to use Options Flow?
Choosing What to Trade
Usually, the options flow software may indicate which assets are bullish or bearish overall, over a set period of time that you may or may not be able to change.
This could be a helpful indicator to traders in order to determine the general directional of the assets, as well as the strength of the trend, and assist them in deciding which stock may be best to trade for the day.
If a trader is wary of bearish markets, then they will know what to avoid. Assets might seem to be bullish, but the software may pick up that it is overall bearish. The same is true for the inverse.
Additionally, the software may indicate which assets have the strongest trends, thus indicating which assets might allow for maximum gains.
Using Options Flow to Enter and Exit a Trade
Similarly to choosing what to trade using options flow, a person can identify when to enter a trade.
Seeing a continuous, or increasing rate of trades in a bullish direction may indicate that the market is about to experience a spike, and thus indicate the opportunity to enter a trade. The inverse is true for a large quantity of bearish trades.
When you are already in a trade and witness trades continuing in the direction that you require, it may be an indication that there are still potential profits to be made and that the position should be held a while longer.
It is also easy to see when large firms start trading in the opposite direction. If you are trading bullish, you may start seeing more and more red, indicating bearish trades, on the options flow.
This may be your indication that it is time to exit the trade, as the move by the large traders may push the market to changing direction.
Advantages of Using Options Flow
Data is one of the most important things that a trader relies on. The additional date provided by the software can prove to give a trader the edge of the market, allowing them to minimize loss and maximize profits.
The data provided through options flow, could allow the trader to predict where the market will go, moments before it happens.
Additionally, because nothing is being mapped out on the candlestick graph, it is only an indication of trades that have been made, there is less lag for options flow than there might be for more traditional indicators.
Because options flow is based on options, which are the derivatives of a variety of different assets, it is not limited to any one type of trading. It can be used for a variety of different assets including stocks, forex, efts, commodities etc. and can be used for trades over a variety of different periods. This makes it suitable for everything from retail investors to institutional investors, and everything in between.
Often, there may also be a free version of options flow analyzing software available for a limited time, so a trader can try out the software before they are forced to commit to anything.
This means that retail investors with smaller available capital can also make use of the software.
Other systems may also allow a person to pull information from the 'Darkpool,' which is a collection of all the private trades that occur, among other things, that are not usually available to the general public.
Disadvantages of Using Options Flow
Although most of the options flow software may have a free version, it could be for a limited period of time, or there may be limited availability to data, such as the data lagging for several minutes.
This could mean that you would only truly be able to see how the options flow software works, and if it will assist you with your own trading, after it has been purchased.
Additionally, options flow can be very difficult to read and understand in real time, making it difficult for inexperienced traders to be able to utilize it in their trades.
This also holds the risk of the trader misunderstanding the information that is given to them because of how much there may be and how complex it may be, adding to the possibility of the trader making a misinformed trade, leading to a loss.
Also, even if you are able to read and understand the information that is given to you with ease, it is important to remember that you will never know for sure who placed the trade and why.
And because of that, any extrapolations that are made from the given data are no more than predictions and cannot be perfectly certain.
Is Using Options Flow Reliable
Like all other analyses techniques, the use of options flow only provides data.
Sometimes the software might be able to interpret it as well, but when it comes to data interpretation and signals there will always be a small amount of lag, as the market changes in real time and may even revert some predictions.
For these reasons it is not recommended that options flow be the sole contributor to any decision to enter or exit a trade. Instead, options flow may be a useful tool that will allow a trader to confirm decisions, and make predictions in concurrence with news articles, price action, other indicators etc.
If a person is able to do this successfully using options flow, then they can do the same for a variety of different assets, as options are derivatives of the assets that they represent.
Above all, it is important to remember that the key to successful trading is risk management.
If you are interested in options flow, check out this article on the best free real time option flow tools to help you get started.