BlackBox Flow Training Part 3

BlackBox Flow Training Part 3

 

BlackBox Flow Training (Part 3)

 

THE SPREAD

Sometimes, after the contract and price info, there is a letter.  This letter refers to where the trade was filled within the spread. A “BB” means the trade executed “Below the Bid.” A “B” means the trade executed “On the Bid.” An “A” means the trade executed “On the Ask.” An “AA” means the trade executed “Above the Ask.” This is VERY important to understand, as there is such a thing as Bearish Call Flow, and Bullish Put Flow.

The letters there after that detail section where it says number of contracts price and then there’s a letter the letters are telling us we’re in the spread. These orders are being filled and that’s important for us to know. So, the first thing we notice is the color.  One of the second things we’re going to look for is the contract size and the spread.

So, the spread is going to give us information or the letters. They’re going to give us information on where these are filling with in the spread and that’s important for us to understand. So, think about above the ask. Let’s use an extreme example to make it really easy to understand.

Let’s say the spread is $1.00 by $1.50.  If you go in and place a market order, you’re probably going to get filled immediately close to $1.50. You might get $1.45, maybe $1.40, but you should probably get filled immediately at $1.50 or possibly a little bit less.  If the spread is a $1.00 by $1.50.  And someone tells their broker I can do a limit order for $1.50 and get filled. I can do a market order probably gets filled for $1.50 or a little bit less, but I’m willing to pay $1.60 for this position.  That’s telling us there’s an urgency to get into that position.  So, the spread is telling us what the market price is for this particular contract and someone’s basically telling their broker. I’m willing to pay more than what someone’s asking for it.

In practical terms, that’s showing me a sense of urgency. They really want to get into this position. They don’t care what they’re going to pay. They just want to get into the position. So really important to have that above the ask information there.

on the flip side below. The bid is the same thing. So, if the spread is $1.00 by $1.50 and you’re trying to close out your position, you can put in a limit or a market order and probably get filled for $1.00. If I know I can do a limit order and get filled for a dollar but I’m willing to take less than that. It’s showing a sense of urgency to get out of the position because I’m not waiting to get what I know I can probably get if it gets filled for less than that. That’s fine. Just get me out of the position so below the bid is showing me a sense of urgency as well on the flip side of above the ask. So, the AA and the BB is showing us urgency.

 

MIXED FLOW

The majority of the day, mixed options flow is what we are going to be seeing.  Looking through this, there is a mixture of tickers, calls, puts, bids, asks, sweeps, and blocks.  There is nothing consistent here.  This is what we will be seeing most of the time, and there is nothing here that we would follow into a trade.  Now, any single trade here may or may not work out.  We have no way of knowing that. But, again, what we are looking for is the high probability options trading.  While any of these trades may be profitable, this just isn’t what we’re looking for, if we want to be consistently profitable flow traders.

It’s just individual pieces of flow information coming across the screen now, it doesn’t mean these are insignificant trades.  It just means these are the trades other people are making until we see a story develop. We’re not necessarily going to follow any of this that’s on the screen here. It’s just random mixed flow. There’s no story that’s jumping out at us. So, whether each one of those individual lines will work it could or could not any trade we place there’s two options it either makes money or it loses money.  We don’t know ahead of time which are going to be the profitable ones or the losers.

 

ETF FLOW

We typically don’t follow ETF flow from the scanner.  With puts, those trades could very well be a hedge against other positions.  Also, the dollar amounts typically aren’t huge, relatively speaking.  If we look at the SPY flow below, it is a combined $1.8 million dollars.  That amount is insignificant  compared to the average daily money flow.  The below flow also is about a combined 2800 contracts.  SPY also has an average volume of about 70,000,000.  So, while we may occasionally see something that stands out, With the ETF flow, we typically don’t even pay attention to it.

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