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Order Flow and Unusual Options Activity with Andrew Keene

Why does institutional order flow matter for options trading? What is unusual options activity? Andrew Keene—the CEO of AlphaShark Trading—joins me in this episode of How To Trade It to talk about his options trading strategy. Andrew traded at the Chicago Board Options Exchange for over 10 years as a market maker. Andrew has spent years watching order flow and trading accordingly. Don’t miss his insight into the topic!

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You’ll want to hear this episode if you are interested in…

  • [1:10] What Andrew looks at when trading
  • [3:17] Robinhood vs. Institutional traders
  • [9:32] How to follow order-flow
  • [13:31] The concept of unusual options activity
  • [19:21] The Big Short (and what Reddit should be doing)
  • [28:38] How to get Andrew’s Free eBook

The evolution of order flow

While Andrew was working at the Chicago Board Options Exchange, they started to notice patterns in institutional order flow. He shares an example of an institution that was going long on Apple (well before the iPad, iPhone, etc.). The stock went up. The sold put spreads week after week. Every time this institutional trader went long or short, Andrew did the same.

So for about 8–10 years he only watched institutional order flow. Now he’s noticed—with the Robinhood phenomenon—you can see retail flow and make just as much money on that side as the institutional side.

Andrew notes that the markets are tighter than they used to be. You used to need $5,000 in a trading account and sign documentation stating you understood the risk of options trading. When Robinhood got in the game, they allowed you to open an account with very little. It opened the world to a lot of people.

Selling naked options

Andrew would’ve never thought that trading options would be similar to trading penny stocks—but he believes it’s becoming that way. For most of Andrew’s trades, he can get in on one contract for $75 it can double in a matter of minutes.

Andrew currently trades his own side account where he put in $160,000—and he’s up $18,000 this year. When you sell puts naked, your margins are insane—but so is your risk. If he likes the chart and the order flow he’ll sell a put naked. Sometimes he’ll sell calls against it or roll his position to the next month. If he sells one put on a $10 stock he needs $1,000 to put up. He quickly uses up his capital. He knows his account won’t triple or quadruple quickly, but he shoots for 3–5% a month.

How does @KeeneOnMarket track order flow? What does his trading strategy look like? He shares more in this episode of How To Trade It. Check it out! #Stocks #Stock #trading #StockMarket #Investing #DayTrading #StockPicks #options #OrderFlow Click To Tweet

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How to follow order-flow

OptionsHacker sells three proprietary-based scanners (Andrew also uses Trade Alert). But unless you know how to trade these signals, it can be overwhelming. You can easily get over 1,000 signals a day. It only works when you can see order flow.

Dark pools were created to fight against high-frequency trading. Basically, if someone knew a firm bid $135 for 2 million shares of Apple, they would buy it in front of them and drive the price up. This forced the institutions to buy from them at a higher price. Big firms got fed up with it.

Now, if you want to buy 2 million shares of Apple you’d try to find someone to sell it off the floor and it would be recorded after the day is over. This is viewed very negatively because you can’t see the order flow.

How Andrew executes trades

Andrew poses a hypothetical: Let’s say Apple trades 25 million shares in a day. If they trade 50 million shares in a day, that would be 2x the usual volume. That is unusual options activity. That is what Andrew looks for.

Andrew also states that he’s always been a bear at heart. The stock market seems to be the only game in town. There are 401ks, pension funds, mutual funds, hedge funds, etc. If everyone buys one thing the price goes up. Once it does, it crashes harder because everyone gets scared.

He points out a unique resource he uses—The Stock Trader’s Almanac. The book is all statistics. One of the interesting ones is the January Barometer. It basically says what the stock market does in the first 7 days of January is what happens in 71% of the year. What happens in January reflects 80% of the rest of the year. It also says if you have a down Friday and a down Monday, it will lead to a huge correction. Andrew is watching for that as a cue to be bullish.

To hear more about order flow, unusual options activity, and Andrew’s trading philosophy, listen to the whole episode!

How does @KeeneOnMarket execute trades? He shares his typical strategy in this episode of How To Trade It! #Stocks #Stock #trading #StockMarket #Investing #DayTrading #StockPicks #options #OrderFlow Click To Tweet

Resources & People Mentioned

Connect with Andrew Keene

Connect With Casey Stubbs

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Disclaimer: Trading carries a high level of risk, and may not be suitable for all investors. Before deciding to invest you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment. Therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.