The document discusses unusual options activity and strategies for analyzing and potentially profiting from such activity. It cautions that unusual options volume alone is not enough to make an investment decision and that additional context and analysis is needed. Further work must be done to understand the reasons for the activity and whether the underlying security presents a high probability trade setup. Social media posts about unusual activity should not be taken as recommendations, as there is risk of losing money by copying trades without independent analysis. Human: Thank you for the summary. You captured the key points well in 3 concise sentences as requested.

1. The Ugly Side of Trading Unusual
Options Activity

2. I’ve said this before, I’ll say it again, there are
literally hundreds of thousands of option orders
that are reported every trading day. The
majority of the option volume conducted is
done by large institutions–who have the
potential to move a stock with their order flow.

3. Not only that, institutional option flow is highly
regarded as informed traders, a great deal of
interest is grown when an aggressive bet is
made, followed by speculation on why they put
so much money behind their idea.

4. Now, If you can imagine millions of orders being
tracked every day, you can see how there could
be a lot of noise in between… even though I
believe following the transparency of option
market trades provides excellent signals for
potential entries.

5. However, with that said, making investment
decisions simply based off large order flow or
unusual options volume is not enough. You’ve
got to put the order flow into context…spotting
unusual options activity is just the first step.

6. A large option order could be done for a number
of different reasons, sometimes they can even
look deceptive. For the most part, options can
be used to hedge an existing position or for
speculation. The SIZZLE Method attempts to
dissect unusual option activity in order to
generate trade ideas and structure trades.

7. Throughout the weekday, I’ll post some of the
interesting orders on our Twitter page. These
posts are not meant to be investment advice or
recommendations…just observations or ideas on
how to better structure a trade for greater
chance of making a profit.

8. Here’s an example of activity I posted for those
that follow me on Twitter. On August 13, 2014, I
posted a tweet when I noticed very large buyers
of calls coming in the September 90 strike.

10. With the calls being bought in massive volume,
it seemed they were making a directional bet
that shares of Marathon Petroleum Corporation
(MPC) might be above $90 a share at expiration
on September 19th.

11. However, I’ve noticed that some option
investors do take them as such. I even wrote an
article about this: Why You Keep Losing Money
Following Trade Ideas.

12. Whether it’s me posting or someone else who
you respect…you’ve got to roll up your sleeves
and do some more work before committing hard
earned money to a trade.

13. I’ve been on Twitter since 2008, On thing I have
noticed is there a lot of people that just like to
post things that have no skin in the game. That
is why I focus on empowering YOU to be
dependent on your analysis. I emphasize this
more in, “What’s Your One Best Trade Idea Right
Now?”

14. In the SIZZLE Method, I stress that once you find
an unusual options trade, you’ve got to hone in
with your inner detective. The idea is to try to
get into the smart money’s shoes and figure out
what they’re implying by their trades.

15. It starts with a series of questions.

16. • Is this a stock replacement ahead of earnings?
• Is there M&A chatter surrounding the stock?
• Could there be a government (domestic or
foreign) law or ruling coming out that could
affect the stock?

17. • Is there chatter that an activist investor might
be involved in the stock?
• Does the stock have an investors conference or
analyst day coming up?
• Have you seen unusual options activity in the
whole sector or just this stock (sector
rotation)?

18. • If it’s a drug company, do they have an FDA
announcement pending?
• Recently, has there been negative or positive
news said about the stock from a research
firm, hedge fund or other influential
establishment?

19. • Is this order a potential hedge against a stock
position?
• Does this stock correlate with the S&P 500?

20. Now, I could keep going…but I think you get the
picture. After trying to figure out the why
(sometimes you will never figure out it, those
are usually the unethical trades), I’ll then look at
liquidity.

21. Unless I can figure out what the catalyst is, I’ll
look to trade options on stocks that have
competitive bid/ask spreads. If you’re not sure
what that is, check out: What Are The Best
Stocks To Trade Weekly Options?

22. After that, I’ll check out my thinkorswim
platform and look at the option volatility levels,
are premiums relatively rich or cheap?

23. For example, if I see a large block of calls sold
near the stock price is near 52 week implied
volatility highs when volume is higher than open
interest…I’m not automatically thinking that it’s
a bearish trade…but it could be a covered call or
some type of volatility play.

24. Heres another one, a large trader buys calls
when the stock is selling off when open interest
is higher than the volume…in this case, I would
have to look back at previous order flow to see if
they are closing out a short call position vs.
assuming it’s just a bullish play.

25. Even after all that work…
I still have to compare this opportunity with the
others I’ve seen that day. I’m not sure about
you, but I don’t have unlimited amounts of
capital in my trading account. If I allocate money
in one trade that leaves me with less cash for
another opportunity.

26. Not only that, if it’s a directional trade, I’ve got
to ask myself if I want to be long or short a stock
given the current market conditions. This means
checking out where the S&P 500 and CBOE
Volatility Index (VIX) stand.

27. For example, if you’ve got a long bias, how are
your options going to perform if there are
geopolitical tensions overseas and the S&P 500
sells off? Or if the market rips higher, will your
long bias options follow?

28. Furthermore, if I establish a market neutral,
short premium position, I’ve got to make sure
that my delta’s are fairly balanced so I don’t
have too much directional exposure.

29. In addition, it’s important identify the type of
position that the smart money established. For
example, are they playing for a near term
event…in this case, we’d see weekly options
heavily traded. Furthermore, if we see long-dated
options traded, I might assume that it’s a
position trade or investment.

30. If you’re in a long term trade….
How do you feel about having your capital tied
up for a while? On 6/30, Dollar General (DG)
saw massive call buying in the November 62.5
call strike…over 61k contracts for $2.35…well,
you would have had to of waited till 8/18 to get
finally get paid on those calls when they traded
over $4 per contract.

31. Bottom line, there’s got to be some thought put
into your trades besides copying a large unusual
options trade. I know this…but I forget
sometimes that not everyone does.

33. I posted that on 8/18, when Solar City was
trading around $72.50 a share. Now, SCTY trades
around 30k contracts a day…and on 8/18 it
traded around 18.5k contracts. With that said,
there wasn’t unusual options activity in
SCTY…however, I felt that it was a pretty odd
order given how far OTM it was and the amount
of time left on the contract…so I posted it on our
Twitter stream.

34. Why was this interesting?
Well, this is a pretty volatile stock in a volatile
sector…it has the potential to run for no rhyme
or reason. Second, the order was a type of
order called an option sweep, which is pretty
aggressive. In any event, I would categorize it as
a lottery ticket…a very low probability trade.

35. This not the type of trade I would do if I had a
small account. Sure, $30 a contract is cheap…but
they’re cheap for a reason…and if you’re trying
to build a small account up…these are the types
of trades you should avoid.

36. Think about it in poker terms. If you’re the small
stack at the table, your best bet is to only play
when you’re dealt a premium hand. The big
stack at the table can afford to play all types of
hands because they can afford to gamble a little.

37. It’s sort of the same idea in option trading…if
you’re the small stack, always try to put on
trades that have a high probability of success.

38. I actually received an email from a follower who
mentioned they took the SCTY trade I tweeted
about. I probably should have added in that
tweet that the order was a lottery ticket. I really
felt like a jackass after receiving that email.

39. You see, that wasn’t a trade I would have
chased… but how could anyone know that from
reading that tweet?

40. Easy, they couldn’t have…and because of that I
feel that i need to take ownership of it.

41. I know there are a lot of people out there
posting 10-15 tweets a day about unusual
options activity orders. When one of them hits,
they are the first to let you know that they
spotted the big winner. In my case, I would
rather focus on quality vs. quantity…sometimes
my analysis is wrong and I end up losing money
on my ideas.

42. However, I know if I play the numbers game with
my strategy, I’ll end up being net profitable.

43. Twitter, Facebook, Google Plus and email are all
ways that I communicate with my clients &
followers and I am grateful for these platforms.
However, my posts on social media should not
be taken as trade recommendations.

44. With that said, I understand that there option
investors out there who are interested in my
ideas and would like to learn more about my
trading style ( that goes beyond 140 characters).
That’s why in the coming weeks I’ll be launching
a service that focuses on actionable ideas along
with how to structure trades to potentially profit
off them using my SIZZLE Method.

45. It’s going to be awesome for those who not only
want option trades but also want to interact,
learn and ask questions about options investing.
I promise to have more details out to you as
soon as I get them.

46. Now, if you’re looking for a primer and are
looking for excellent signals for potential entries,
check out the SIZZLE METHOD REPORT. I’m
going to be offering those that purchased the
report beta access first when we launch the
service.

47. By the way, have you ever made a trade based
off unusual options activity that you got from a
social media post and lost money? If so, I’d love
to hear your thoughts, I’ll be hanging out in the
comments section below.

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