Options money flow can be used as a strategic tool in your trading arsenal, but you have to have some experience with it to fully appreciate the power of it. If you are new to the game of order flow, the best thing to do is to just sit back, watch what’s happening, and get familiar with the fundamentals.
Order flow definitions
Just like any other trading strategy, there are certain indicators that can give you a better understanding of how options flow works and help you grasp the overall concept of what “smart money” is doing.
Sweep & split orders
Sweep orders signal momentum and urgency by way of intelligent market routing systems. Typically broken into smaller orders and hitting multiple exchanges, this is used by smart money to stay “irrelevant” and under the radar. This is a very good indicator that a trader wants to get into a position as fast as possible because they might know something that may affect the underlying stock’s share price the very next day or in the near future.
Split orders work the same way but are filled on single exchange systems.
Block orders
Option block orders usually signal massive size purchases used by institutional investors and traders with very deep pockets. These are negotiated privately from the public market, meaning you won’t be seeing individual retail investors buying these up.
Some key fundamentals to know:
- Don’t always assume large orders coming through the system are fool proof trades that you should take. Remember, we really don’t know what the intentions are behind these orders. More than likely, traders could be hedging against their overall exposure to the market.
- Look for overall or individual market / stock sentiment. If the market is bullish extreme, steer clear of aggressive call-buying. If the market is bearish extreme, steer clear of aggressive put-buying.
- Smart money likes to come into weakness. When retail trades are selling, these guys are coming in and buying. Utilize charts and spot equities that are breaking down. Look at historical flow and see if there were any key purchases made in the past.
- Options money flow during earnings season is useless. Stocks will be extremely unpredictable at this time and any logic we try to derive from money flow will be warped.
- Look for new names catching money flow. Smart money will start buying into these new names for a number of reasons but always check the historical data and keep an eye on it.
Make sure to check out our in-depth review of options order flow basics. We cover all the general knowledge and tips you need to be successful in understanding order flow data.
Final thoughts
Leveraging options money flow knowledge can have a huge impact on how you trade. Unfortunately, finding reliable services that provide quality data is hard to come by. That’s why at Cheddar flow, our aim is to make money flow more accessible to everyone.
With our intuitive dashboard, you can easily understand what types of trades are happening, be informed about market sentiment, access charts and historical information all in one place.
Follow us on twitter @cheddarflow or learn more at cheddarflow.com
