Today, most investors use a mix of one or more of the following (in no particular order) to frame their views on a stock’s valuation:

  1. Company related news in the media

  2. Company filings (10K’s, press releases, insider transactions etc.)

  3. Sell side research reports

  4. Stock price/volume action

  5. Meetings with management

Lately, in their quest for alpha, investors have been using alternative data sources that provide information about supply/demand trends. Options activity in any given name is a natural source of useful information about the views of a relatively sophisticated class of market participants- views that are being backed by real money on the line.

Volsage’s analysis makes it possible to know the actual structures as well as the net risks that have traded in a name so far on the day in real-time. Investors should consume this information as they would, say, items 1 and 4 above, and use it as an input to their overall “model” of a stock. When a big block of stock hits the tape, investors always want to know about it. They would similarly be very receptive to knowing about big option trades in stocks of their interest.

Some examples of how investors could benefit from Volsage:

  • Investors can see a summary of net vega traded by sector. If Technology vega is for sale, while vega in a specific technology name is to buy, this may warrant further investigation into upcoming events in that name. At a portfolio level, knowing which sectors are risk-on versus which sectors are derisking can be useful for risk management.

  • Net delta shares traded in a name gives an idea of the directional bias of all the options activity in a name so far. For example, significant net delta shares to buy over a few days may signal that the option traders are bullish on the name. An investor may consider adding to a long position or consider taking a second look at an existing short position.

  • Net vega traded in a name gives an idea of whether the options market is expecting the stock to be more volatile or less volatile going forward. Net vega by maturity provides insight into what maturities the options market is saying the volatility in the stock will pick up/stay subsided. An investor that sees size buying in say 3 week vega may consider researching any upcoming events in the next 3 weeks.

  • Looking at net contracts by wing (put wing is 30 delta or lower puts and call wing is 30 delta or lower calls), an investor can get a sense of the future distribution of stock prices that option trades are implying. For instance, if most option buying is in the call wing, one can infer that the expectation is for significantly higher stock prices. If the call wing is for sale and the put wing is to buy, the future distribution implies a higher probability of lower stock prices. Knowing this information will help the investor calibrate his views on a stock and tactically adjust risk.

  • Looking at reversal conversions, boxes and jelly rolls that are trading in a name gives an investor insight into the plays being made on the future borrow rate in the stock and/or the future dividends that will be paid by the stock. Let’s say on Oct 1st, an investor that is short NIO stock sees a reversal conversion trade in NIO, where a customer buys 1MM shares for $1.58, buys 10K Nov $2 strike puts for $0.69 and sells 10K Nov $2 strike calls at $0.16. The implied rate of borrow that the option trader has locked in on long stock is 44%. This signals that the stock may get harder to borrow in the coming weeks. The investor may then consider contacting his prime broker to lock in a term borrow rate.

Considering that Volsage has pioneered this way of analyzing option flows, and that this is a very recent product, investors who use our product would differentiate themselves from peers who don’t.

Options trading entails significant risk and is not appropriate for all investors. Complex option strategies carry extra risks. Please review the option disclosure document entitled the Characteristics and Risks of Standardized Options.