Recently, I have been reading the daily postings by Andrew Wilkinson at seeking alpha: http://seekingalpha.com/author/andrew-wilkinson Andrew seems to be a pretty smart guy. He spots (well, his computer does) unusual high volume option trades and then, by looking at the times&sales, guesses whether they were done on the bid or on the ask. In this way, he derives information about what smart money is doing about a given underlying. It looks to me a pretty smart way to look at the market, but I would love to hear from fellow traders what they think about it.
I guess I am skeptical. First, if his computer can find these inefficiencies, wouldn't it be just as easy to program another computer to exploit them at the same time, as opposed to telling you what they are? Second, he is the "senior market analyst" at IB. I can only imagine which pocket IB would like to pick--oops, I mean which markets IB would like to analyze.....
Even your post says "guessing", Just because there is volume doesn't mean there is valuable information there or anything worth trying to exploit. For example, maybe I daytrade in and out of 500 contracts, volume of 1000 posts and average daily volume is 10. That volume shows up as much higher than average daily volume but............in the end the open interest didn't change and there was no value to the signal. Be wary of all gurus. If the signals were so valuable, he would exploit them himself, not publish them for others...
Many thanks for your answer. Your post raises the important point that his method should be, at the very least, coupled to the analysis of open interest.
Absolutely agree, but the way I look at the problem is the following. Possibly, there are methods that allow to consistently outperform the market. Of course, they are well kept secrets and it is almost impossible for retail investors to have access at them. On the other hand, there is information out there that could give you an edge. But, of course, you need to properly exploit it. This means that you have to throw in also good money management, study of the underlying, etc.
Going one step further... Suppose I buy 500 puts at the ASK price. Am I smart money buying bearish puts? Suppose I already owned 5,000 shares of the underlying and was just hedging the lonh position. Doesn't matter if this adds to OI or not. My volume tells you nothing.