Who would’ve thought?
The shortest bear market for the Dow in history is “over”, according to the talking heads at least. However, despite the S&P 500 rallying by more than 10% last week, it’s still more than 20% off its high.
The coronavirus is devastating one economy after another, and traders are still trying to put the pieces of the puzzle together… as they wonder whether they should “buy the dip” or “sell the rip”.
To help as many people out as possible, I opened up a discussion to try to figure out where traders are struggling… and it seems like many are having a tough time generating trade ideas.
Of course, you could listen to all the talking heads on the tube for ideas. However, I won’t be doing that — instead, I’m focused on what I believe is the number one indicator out there.
What indicator am I referring to?
In this market environment, it helps to have a few tricks up your sleeves. For me, one of my favorite indicators is order flow. In other words, I’m tracking where some of Wall Street’s largest players are shoving their chips.
More specifically, I’ve turned to the options market to try to figure out where the elite are placing their bets. That way, when I see a juicy trade setup, I can take advantage of and potentially profit alongside them.
How does this work?
Well, it’s something known as unusual options activity. Don’t let that term scare you off, because I lay out everything you need to know about it in my eBook Dollar Option Trader — you can grab it here for absolutely free (while supplies last!).
In the meantime, let me walk you through a quick example.
Stock ABC trades 1,000 options contracts per day, on average. However, one day, it traded 8,000 calls. That would be an example of a stock option that saw unusual options activity.
However, if you’re following the order flow… it’s all about thinking in relative terms.
For example, 5,000 contracts on a single order in the S&P 500 ETF (SPY) might seem like a lot, but it’s not when you consider that SPY trades millions of options contracts on any given day.
If you’re able to decipher options activity, it could provide an edge like no other.
The idea is simple.
Hedge funds and other professional traders often use options to express their opinions.
So, whenever they, you, or me, place an options order it gets reported to the Options Price Reporting Authority.
In other words, we can find out exactly what some of the largest players are doing. We don’t know who’s behind the trade, why they’re getting in, or anything else really.
The only thing we do know is someone with massive financial backing is getting into the trade. The challenge then becomes trying to dissect why they’re doing it.
For example, a trader could come out and buy a massive amount of puts. To the naked eye that might appear like a bearish bet.
- The trader was short puts and is buying puts to hedge
- The trader is long a boatload of stock and is buying puts to hedge
- The trader is short the stock and is buying puts to lock in profits
It’s similar when there’s massive call buying in a specific stock.
As you can see, it isn’t black and white, and there is a lot of noise you need to filter out.
You’re probably wondering, Kyle… does this actually work?
Let me walk you through a real-money case study from a few weeks ago, during one of the worst bloodbaths in history.
Does This Indicator Actually Work?
Of course, during the first few weeks of March, we witnessed some wild action in the market. Traders were just starting to realize how the coronavirus was impacting the global economy, and fear was rampant in the market.
However, I was able to remain calm, cool, and collected because I was relying on my simple-to-use indicator.
One day, I noticed 766 NVTA April 17th $15 Puts swept for $0.45 a piece — that was a $34,470 bet. They were purchased when NVTA was trading above $18 per share!
That meant this put buyer was expecting NVTA to drop below $15 on or before the expiration date (about a month away at the time). So I decided to place the stock on my watchlist.
On March 10 at 10:34 AM, I actually pulled up NVTA, and noticed that the stock was relatively weak against the broader market — SPY was actually catching a bounce that day.
So I bought 50 NVTA March 20 $15 Puts at an average price of $0.61. That trade cost me about $3,050 to put on.
Well, guess what happened just 2 days after I entered the trade?
Those NVTA puts were going for $2.00! That $3,050 bet turned into $10,000, or approximately $6,950 in real-money profits!
In just 2 days, I was able to lock down a 233% winner.
The thing is, we see this type of action frequently in the markets… and if you want to start to take advantage of these options plays, then click here to claim my complimentary eBook Dollar Option Trader — in it, you’ll find out EXACTLY how the “smart money” uses options to generate insane returns.