Let say you look at ABC puts and you see there are 5000 puts traded for 1 specific trade 1 specific strike price. Usual volume is 50 . So what does it tell you ? If someone sold those puts they are bullish but whoever bought them is bearish . So how do you use unusual volume in options? Thank you
It doesn’t tell you anything. did they delta hedge? What was their position before? Is there another trade associated with it? This is of course assuming you know if they bought or sold.
but in which direction ? It seems to me that unusually large volume is more of a volatility play . There should be a significant move in some direction .
The buyer and the seller in a trade agree only in the negotiated price, but they differ in the future direction of the underlying stock. So, for others it seems impossible to make any directional use of such an information to be used in own trade. But yes, it should have a big impact on the volatility (and option premiums), ie. IV should rise, but not necessarily the underlying stock. Ie. volatility traders get a useful info from such big trades in the book, but not the directional traders.
You already answered your own Q ; someone who sold those puts is bullish but someone who bought them is bearish.
no. You don’t know the motivation at all. It could be a hedge, part of a pair trade, part of a basket trade, or an outright view. it could even be a layoff trade (against say a corporate trade).
large volume isn’t indicative of anything. true you have to trade large volume to get enough Vega. But 5000 options is only 50,000 shares. That’s only like 10MM notional for a name like tsla. Do you think Ken griffin even notices when one of his traders puts on 10mm of tsla?