New Beta Release! Net Option Flow

We're excited to announce our latest beta feature release from BigShort: Net Option Flow (NOF)! With NOF, we differentiate between option buys and sells, weigh option flow by money transacted rather than simply by contract size, and track overall options sentiment for every NYSE and Nasdaq listed ticker. In this post, we'll explain how this is a groundbreaking new way to look at options volume, and what patterns to look for. We also want to emphasize that this product is in beta, and may change down the line.

Differentiating between Buys and Sells:

Traditional option volume registers 1 million contracts bought and 1 million contracts sold as the same. We differentiate between buys and sells, with buys pointing up and sells pointing down. This implies a directional bias. If options are being bought, they point up, if options are being sold, they point down. In general, buying calls and selling puts are bullish, selling calls and buying puts are bearish. 

Net Option Flow works great for trading ETF’s like SPY and QQQ, but it works even better on individual stocks. This is because ETF’s are often hedged with futures, whereas with individual stocks we display 100% of the market for that equity and the options which might affect it.

Dollar Weighted Flow:

Traditional option volume doesn’t account for the amount of money going into the trades that comprise it. With options volume, 1000 contracts bought for 1 cent registers the same as 1000 contracts bought for $10. With Net Option Flow, we weigh the latter 1000x more heavily. We also deduct the buys and sells from each other, whereas traditionally, they are just all added up to create option volume. This is a novel approach for displaying options flow that reveals the net dollar-weighted reality.

Net Option Flow Accumulation (NOFA):

This green NOFA line shows the overall options sentiment for a given time period, and tracks whether there are more dollars flowing into bullish or bearish positions. If the green line is above zero on a 5min chart, this means that the net sum of past options trades throughout the day is positive. If the green line is below zero, this means that the net sum of past options trades throughout the day is negative. We can also observe the magnitude of movements in the green NOFA line to see how big the current flow is relative to what occurred prior. We can think of NOFA as an accumulation of inventory (positive or negative) throughout the day, which has longer term implications than the bar by bar NOF (net option flow for 1 candle).

Accessing Net Option Flow:

To turn on Net Option Flow, just select “Net Option Flow (Beta)” under chart settings (the gear button on the top right of the chart).

Chart Examples:

First let’s start with SPY!

Blue represents calls, and purple represents puts. As stated earlier, buying calls and selling puts are both bullish. In (1) we see both a blue hill pointing up (1a), which means that calls are being bought, and a purple hill pointing down (1b), which means that puts are being sold. So in the same 5 minute candle, both put and call flow are betting in the same direction. This is a bullish signal. In (2) we see another purple hill point downward, which is put selling, which is again, bullish. The green line, Net Option Flow Accumulation, or NOFA, becomes more bullish due to this put selling, and we see price go up afterward.

Now let’s take a look at TSLA!

Here on TSLA, on (1) we see the opposite pattern as we saw on SPY (1), with puts being bought (purple hill pointing up) and calls being sold (blue hill pointing down) simultaneously. Also note that the options flow is so big that it smooths the rest of the options flow hills, which means that the effect is going to be strong, and this leads to a sharp decrease in price. Later in the day, we see another large call selling hill (2), which leads to more downside on TSLA. We also can see that NOFA (green line) moves bearish before we see new lows on TSLA.

Key Takeaways:

Hill pointing up: options being bought

Hill pointing down: options being sold

Buying calls (blue hill pointing up): Bullish

Selling puts (purple hill pointing down): Bullish

Selling calls (blue hill pointing down) : Bearish

Buying puts (purple hill pointing up): Bearish

NOF: Net Option Flow for one candle

NOFA: Net Option Flow accumulated throughout the entire day

Scale matters, the larger the better.

Option buying tends to be stronger than option selling.

Conclusion:

With this feature, we’re displaying exactly what is going on in the options market at any given moment, visualized in a new and novel way that we feel creates more directional guidance. What other players do in the options market, especially in large quantities, is going to have an effect on future prices, and we’ve found Net Option Flow to be the best way to visualize that effect. We recommend using Net Option Flow in conjunction with dark pool prints, SmartFlow, and Manipulation, and remember that no system is 100%, so always exercise proper risk management and respect stop losses. Net Option Flow will remain in beta until we load historical data, which we anticipate that will be in about 1 month’s time. 

We’re elated to see our users having such positive reactions to this feature, so thank you guys for continuing to trade with us! Your positive feedback on our platform is what keeps us motivated to make the best possible day trading tool on the market. And stay tuned, because we have some really exciting things in the pipeline!