🍋Options Activity Type
In the options trading market, the elements of rise, fall, buy, and sell can be combined to create four trading types.
The Four Basic types of Options Activity
Buy a call option: Investors who buy call options have the right to purchase the underlying asset at a pre-agreed price (strike price) on the option's expiration date.
Sell a call option: Investors who sell call options are obligated to sell the underlying asset at a pre-agreed price (strike price) on the option's expiration date.
Buy a put option: Investors who buy put options have the right to sell the underlying asset at a pre-agreed price (strike price) on the option's expiration date.
Sell a put option: Investors who sell put options are obligated to purchase the underlying asset at a pre-agreed price (strike price) on the option's expiration date.
In options trading, to explore more market implications of a transaction, it is often combined with "to open" or "to close" positions. Therefore, the above four trading types can be simplified into two categories:
· Buying Options Contracts
Buy to open
Buy to close
· Selling Options Contracts
Sell to open
Sell to close
"Buy to open" refers to investors purchasing a new position for themselves, where this new position can be either a call or a put. When investors are ready to sell (or close) the position they bought, they will "sell to close".
"Sell to open" refers to investors opening a new short position. To close the "sell to open" position, they would need to "buy to close".
The details of an options trade are crucial and can be challenging to navigate. In previous articles by the TradingFlow Team, there have been signals captured through identifying large opening trades.
Read more: What to Learn from Shorting Tesla Stock Amidst Its Decline?
How to Identify the Type of Options Activity?
The buying and selling of options are determined by whether the option trade occurs at the ask or bid side. If the option trade is initiated by the buyer, they will match the trade with the ask price on the order book. Similarly, sellers will match trades with the bid price on the order book.
However, to determine whether it is an opening or closing position, it is done by comparing the open interest (oi) of the option chain on the following day with the open interest of the current day. If the open interest of the option chain increases, it indicates an opening position; conversely, if it decreases, it indicates a closing position.
To assist traders in more accurately determining the movements of the Smart Money, TradingFlow has launched a new feature. In the "Option Chain Analysis" data panel, it combines Option Flow with open interest boards, adding reference elements for determining option trading operations. The example below shows the data related to Tesla ($TSLA) as of 3rd April:
On 28th March, there was an overwhelming volume of trades executed at the bid side. The updated open interest (oi) data on the following trading day showed a sharp increase. Thus, we can speculate that the trades executed at the bid side were likely "sell to open" positions.
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