Order Flow

What is Order Flow

Institutional Order Flow is a tool used by most options traders. Although it is primarily used by options traders, it can be very beneficial to stock traders as well.

Before Order Flow tools existed, option traders used tons of scanners and tape reading tactics to spot unusual activity in options. As you can imagine, this is extremely tedious and requires intensive learning to be able to master this skill. Watching unusual option orders should not be a difficult task and Tradrz Flow makes this as simple as possible!

Unusual orders are used to "Follow The Smart Money!". Institutions use options because they allow a large amount of leverage to be used and also provide multiple routes of hedging share positions. Our job is to spot "unusual" activity and find the reasoning that these institutions are placing these large orders and we can attempt to follow their trade since it is likely that that they have more information than us.

How To Read Order Flow

When reading order flow, there are a few things we need to pay attention to:

  • Ticker

  • Strike Price

  • Option Type

  • Premium

  • Expiration Date

  • Open Interest

The ticker will always be listed at the top of the order along with the strike price and option type. In this description, we will use the "MSFT" order.

TICKER
STRIKE PRICE
OPTION TYPE
PREMIUM
EXP. DATE
OPEN INTEREST
TICKER

The ticker is "MSFT". This tells us what company was traded in the order; Microsoft Corporation.

STRIKE PRICE

The Strike Price is a key part of options. This tells us what price the buyer expects the underlying stock to go to before his/her expiration date. In example: 245 CALLS

This tells us that the buyer expects MSFT to be greater than $245.00 since this is a Call Option.

OPTION TYPE

Option Type is also important to notice when reading option flow. The two types of options are Calls and Puts. By definition a Call is: "Call options are financial contracts that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity or other asset or instrument at a specified price within a specific time period."

"A put option is a contract giving the owner the right, but not the obligation, to sell–or sell short–a specified amount of an underlying security at a pre-determined price within a specified time frame."

In other words, a Call is normally a BULLISH position, and a Put is normally a BEARISH position.

PREMIUM

Premium is the total amount the buyer paid for the position. In the MSFT example, the order costed a total of $34,000 which is not a large amount in the grand scheme of options.

This is important to notice because larger orders tend to have more reasoning behind them, meaning they are more likely to be profitable on their position.

EXP. DATE

All options have expiration dates. This is a set deadline in which the option contract must be profitable by. If the contract is not profitable at the end of the deadline, the contract is worth $0 and the buyer has lost the entire position amount.

You do not HAVE to hold until expiration. Option contracts fluctuate in value and can be sold for profit any moment between time of purchase and expiry.

OPEN INTEREST

Open interest is the measurement of the amount of contracts being held overnight. We track this to make sure option traders are not closing out of their position and are still confident. In the example, OI = 15272. This means that there is currently 15,272 of these specific contracts being held overnight.