How Do You Read Order Flow For Unusual Options Activity?
Order Flow is basically the study of the way a stock reacts to the limit or market orders that are placed at certain price levels.
When it comes to Unusual Options Activity, the order flow principles are the same, in that you want to pay attention to how the Option price, and the price of the underlying stock, are reacting to the trades/orders that are coming in.
The Two Types Of Orders
There are two basic order types when it comes to Order Flow analysis:
1) Passive orders &
2) Active orders
Passive orders are all the limit orders that are placed by traders who are waiting to be filled and you can usually see these orders sitting at the Bid or Ask on the order book.
Active orders are market orders that come in either above the ask or between the bid and ask. These are the orders that move the market.
Interpreting The Orders
So how can we use this info to trade?
1) Identify the Unusual Options Activity (UOA)
2) Check to see if the UOA orders are coming in at or near the ask or above it.
3) Watch to see how the underlying stock/ETF is reacting to the UOA orders coming in.
4) If the stock is reacting positively to a bullish sweep then that is obviously a good thing and vice versa.