All flow is not made the same, and the type of flow you should be paying attention to is strongly dependent on your trading style. If you are a scalper, you are looking for a very different type of flow than you do as a swing trader. Let's try to break down what kind of flow applies to your trading style.
Day Trading / Scalping
This type of trading is often referred to as short-term trading and characterized by not taking positions with you home overnight.
Jesus feels this is where the actual edge in this information lies because you can manage your risk more effectively. We often see the immediate reaction once that sharp or aggressive order hits the tape, making it easiest to follow on shorter time horizons.
“These are not exact numbers, but in my opinion, roughly 80% of Wiseguy orders that I look for will see some reaction. Whether it’s from market makers hedging their book or a word starting to circulate regarding that transaction, you will often see a tradable push off these bets.” – Wall St. Jesus
How drastic of a reaction or how long that push is sustained will vary and depends on several factors: size, multiple orders, sharpness, aggression, liquidity, and market conditions, to name a few.
Regardless, words can’t stress how significant that initial push or “cushion”, as Jesus likes to call it, can be to whatever form of day trading you are looking to take part in.
As explained above, the most edge from options flow applies to shorter-term trading.
However, certain types of orders can lend a helping hand in regards to longer-term time frames.
An important thing to understand is that once the underlying name sees an impact from these sharp orders, it’s up to you to take the wheel of the trade.
Wiseguys have (probably) deeper pockets than you and can hold out a lot longer than you can, and obviously, the longer you hold onto an option, the more risk you take on.
In other words, just because you’re making a bet that’s the same or similar to a Wiseguy’s, doesn’t mean you’re safe. Everybody loses in trading, regardless of size, money, or intelligence. Everybody loses at some point in this game. Get that into your head! The sharp money knows how to win more than they lose. That’s it!
Now that the trade is entirely in your hands, it must go by your rules!
Don’t get all caught up in the bet itself. Checking open interest to see if the position still sits there can be interesting but doesn’t guarantee anything.
We have no idea what is happening behind the scenes or the real reason why that player put this bet on in the first place.
That’s why Jesus is a big proponent of trying to stick with repeat buying and/or multiple orders when it comes to swing trading, there’s a better chance that the bet you’re trading off of is legit.
Stick to your trade plan and use Wiseguy action as confirmation of what you’re already looking at. It’s telling you that there’s a good chance that what you have been looking at might be in play.
Position Trading / Investing
Longer-term trading or investing is where flow provides the least amount of edge and valuable information. As mentioned earlier, the longer you hold a position or trade, the more risk you take on. That is not to say option flow does not provide some information for longer time frame traders and investors.
We do see LEAP orders going through on a relatively frequent basis. This type of order can provide sentiment and be a gauge for supply/demand in individual names from large institutions and funds on a longer time frame.
You need to have some game plan or strategy.
What type of trader are you?
What type of trader do you want to become?
When you know the answers to those questions, you too will win more than you lose and play SHARP! And that’s the name of the game, dear friends.
Questions or suggestions?
Please reach out if you have any further questions or suggestions.