1. Call vs. Put Options
Definitions, Key Differences, and Basic Use Cases
Call Options
Definition: A contract giving the buyer the right (but not the obligation) to buy an underlying asset (e.g., a stock) at a specific strike price on or before the expiration date.
Basic Use Case: Traders buy calls when they anticipate the stock price will rise above the strike price, aiming to profit from upward price movements.
Put Options
Definition: A contract giving the buyer the right (but not the obligation) to sell an underlying asset at a specific strike price on or before the expiration date.
Basic Use Case: Traders buy puts when they anticipate the stock price will fall below the strike price, aiming to profit from downward price movements.
Interpreting on UnusualFlow:
Calls vs. Puts: When you see heavy call flow at or above the ask, it often signals bullish sentiment. Heavy put buying may indicate bearish sentiment.
Premium & Volume: Track large premiums spent on calls/puts as potential indicators of high conviction trades.
2. Strike Price & Expiration
How They Affect Option Pricing and Strategy
Strike Price
Definition: The agreed-upon price at which the underlying asset can be bought or sold.
Influence on Premium: The further an option is in-the-money, the higher its intrinsic value; conversely, deep out-of-the-money options have lower premiums but carry higher risk.
Expiration Date
Definition: The last day an option is valid; after this date, the option expires worthless if not exercised.
Time Decay: As the expiration date approaches, the “time value” of the option diminishes (Theta decay). Shorter time frames can mean cheaper contracts but less time for the trade to work in your favor.
Interpreting on UnusualFlow:
DTE (Days to Expiration): Monitor short DTE options for high conviction or potential “quick plays.” Long DTE options may signal a more extended outlook by institutional traders.
3. Intrinsic Value vs. Extrinsic Value
A Deeper Dive into an Option’s Total Value
Intrinsic Value
Definition: The real, immediate value if the option were exercised right now.
For Calls: max(Stock Price−Strike Price,0)
For Puts: max(Strike Price−Stock Price,0)
Key Point: An OTM option has zero intrinsic value (its value is purely extrinsic).
Extrinsic (Time) Value
Definition: The additional premium above intrinsic value, accounting for time, implied volatility, and market conditions.
Drivers: Time to expiration, volatility, and interest rates/dividends.
Interpreting on UnusualFlow:
Premium Column: Large premiums often contain both intrinsic and extrinsic components. Look at the strike vs. the stock price to gauge how much of the premium might be intrinsic.
4. Option Chain Explained
How to Read an Option Chain on UnusualFlow
Option Chain Layout
Calls and Puts: Typically listed side-by-side around a central strike price column.
Strike Prices: Incremental levels at which each option contract can be exercised.
Expiration Dates: Each chain often splits by weekly, monthly, or quarterly expirations.
Key Data Columns
Last Price: The most recent trading price for that contract.
Bid/Ask: The current best available prices to sell (bid) or buy (ask) the option.
Volume (Vol): The number of contracts traded during the current session.
Open Interest (OI): The total number of outstanding contracts not yet closed or exercised.
Implied Volatility (IV): The market’s forecast of the underlying’s volatility.
Interpreting on UnusualFlow:
Streamlined Chains: UnusualFlow’s chain view highlights high-volume or high-premium strikes.
Sorting & Filtering: Quickly zero in on specific strikes with unusual activity to see if institutions are focusing on certain price levels.
5. Implied Volatility (IV)
What IV Is, Why It Matters, and How It Affects Option Pricing
Definition & Importance
Implied Volatility (IV): A metric that reflects the market’s expectation of how much the stock will move (up or down) over a certain period.
Effect on Options: Higher IV = higher option premium, because there’s a greater chance for the underlying to make significant moves.
Factors Affecting IV
Earnings/News: Major events can cause IV to spike as uncertainty increases.
Market Sentiment: Fear and greed swings often drive IV up or down.
Interpreting on UnusualFlow:
IV Levels: Watch for spikes in IV around news or earnings announcements.
High IV Premium: Institutions may sell options to capture high premiums if they believe actual volatility won’t match the market’s expectations.
6. Historical Volatility vs. Implied Volatility
Differences and Use Cases in Trading Decisions
Historical Volatility (HV)
Definition: The actual past price movement of the underlying asset, typically measured as standard deviation of returns over a lookback period.
Use Case: Helps gauge how volatile the stock has been, acting as a reality check on IV.
Implied Volatility (IV)
Definition: Forward-looking; derived from current option prices and reflects the market’s expectation of future volatility.
Use Case: Guides pricing for new trades—if IV is high relative to HV, options might be “expensive.”
Interpreting on UnusualFlow:
Comparisons: If IV is significantly higher than HV, it can signal the market is bracing for big moves. Look for unusually large premiums around such periods.
Strategies: Traders may choose to sell options when IV is exceptionally high or buy options when IV is unexpectedly low relative to historical trends.
7. Open Interest & Volume
Why These Metrics Matter for Liquidity and Potential Price Movement
Volume
Definition: The number of option contracts traded in a given time frame (e.g., daily).
Significance: High volume can indicate strong interest in that strike/expiration. It may also improve liquidity and narrower bid-ask spreads.
Open Interest (OI)
Definition: The total number of outstanding contracts that remain open/active (not yet closed, expired, or exercised).
Significance: Rising OI combined with rising volume can confirm momentum. Falling OI might indicate that traders are closing positions.
Interpreting on UnusualFlow:
High Volume & OI: If a particular strike has unusually high volume and increasing OI, watch for a potential price move.
“Closing” vs. “Opening” Trades: Big institutional trades can either add to or reduce OI; understanding these changes helps you spot new trends or position exits.
8. “In the Money,” “At the Money,” and “Out of the Money”
Detailed Implications for Each Moneyness Category
In the Money (ITM)
Definition: Calls are ITM when the underlying’s price is above the strike; puts are ITM when it’s below the strike.
Characteristics: Higher intrinsic value, more expensive premiums, lower time decay risk if close to expiration.
At the Money (ATM)
Definition: The strike price is very close to the current market price of the underlying.
Characteristics: All extrinsic value, highly sensitive to changes in implied volatility and time decay.
Out of the Money (OTM)
Definition: Calls are OTM if the underlying’s price is below the strike; puts are OTM if it’s above the strike.
Characteristics: No intrinsic value, cheaper premiums, can offer high potential returns but higher probability of expiring worthless.
Interpreting on UnusualFlow:
Moneyness Indicators: Look for OTM trades with large premiums—often signals a strong directional bet.
Risk/Reward Considerations: ITM trades may imply institutional hedging or a more conservative approach; OTM may suggest speculative bets on big moves.