BlackBox Flow Training Part 2

BlackBox Flow Training Part 2

 

BlackBox Flow Training (Part 2)

 

OPTIONS FLOW

Options flow is simply the options trades that are coming across our scanner.  We are watching this options flow to get an idea of where the big players are putting their money.  We can use this information to decide if we want to follow their trade, and piggyback on their idea.   There is good and bad flow, and depending on how the flow comes in, we have seen a higher probability of profitability.  After watching  the flow constantly, we have a pretty good idea of what trades we want to follow.

So, I said before there’s a lot of information on the scanner. Let’s take a look at one of the lines each time. As we see a piece of flow information, this is what’s coming across our screen. We have all of this information. It looks like one little piece of line and it’s going to scan throughout the day but there’s actually a lot of information on this one particular line.  So, let’s dissect.  A lot of its common sense.

12:51:07 – That’s the time the trade was executed on the exchange.  XLK was this specific ticker that was traded for this particula flow.  8/23/19 was the expiration date.  79.5 is the strike price of the contract traded.  This column will say calls or puts.  79.31, this is the spot price of the underlying at the points where this trade executed. So that gives us a clue without having to look at an options chain or the charts. It gives us a clue whether this is in the money or out of the money. So, when this trade was placed the underlying was that 79.31, and this was for 79.50 call, we’re just barely out of the money by about 20 cents.  556 is the number of contracts executed in this order, and .661 was the price that they paid.  The AA stands for above the ask and that is extremely important.  This column is going to say sweeps or blocks, and this number 36.7K was the amount of the trade.  So, 556 contracts traded at .661 the total trade was thirty-six thousand seven hundred dollars.  26 is the IV of those contracts at the time this trade was executed.

We have all this information on each piece of line that’s coming across the screen.  It’s telling us a lot within that little bit there.  It’s telling us obviously what was traded, when it was executed, the specific contract, whether their calls or puts, the expiration, and the strike price. It’s also telling us the underlying spot price. So, without even looking at a chart we can tell whether it’s getting the money out of the money. It’s telling us the number of contracts and what price that trader paid the AA, in this case, is telling us it’s above the ask.  We’re going to see whether it’s a block or a sweep. We prefer to see sweeps. There’s more of a sense of urgency there.

 

WHAT DO THE COLORS MEAN?

We’re going to start with the colors because that’s kind of the first thing that we noticed when we see flow coming across our screen. The color has significance. The color of each trade shows us the position size relative to Open Interest. There’s three colors white yellow and purple.

When the trade comes across the scanner in white, it simply means the open interest has not been met or exceeded.  A yellow trade means the open interest has been exceeded in this single trade.  A purple trade means the open interest has been exceeded, but it took multiple trades to do so.

So, we like the yellow flow because it shows conviction.  Think about that.  Someone just took out the entire open interest in a single trade.  We also like the purple flow because after OI has been met, more trades are still taking place.  While the white flow may work out if followed, it just doesn’t show conviction enough, to follow on its own.  So, this is why understanding the system is important before following flow.

If we see the same ticker, the same strike, the same expiration, and it comes in white maybe three or four times, that’s going to capture our attention. But if we’re just looking at random pieces of flow and its white line, it’s not necessarily going to do much for us. It’s not going to grab our attention because open interest hasn’t been met. So, the significance of that trade just isn’t there yet.

And if we use a practical example again, if there’s three thousand contracts that are currently open and someone comes in and buys 3,500 contracts, that would show up in yellow and that’s giving us some significance to the trade because in one trade they’re taking out the entire open interest the other important thing about that is since it’s yellow since open interest is being exceeded in the single trade. That’s also telling us that that is an opening transaction.  That’s important.  Because we want to know that it is an opening transaction that’s going to give us a clue as to whether it’s a bullish bet whether it’s bearish and we’re going to use the spread information to determine that as well.

If there’s too much information on your scanner, that’s one of the things you can do. You can filter out those white flow and that just means open interest hasn’t been met yet. So, it might not be significant for you to really watch that. So, for me that I’ve watched this for a long enough time, and I can really dial in what I’m looking for and I’m not there’s not enough noise on there to distract me. So, I leave the white flow on there if there’s too much coming at you. You can absolutely filter that white out that will help a little bit.

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