How to use Option Flows to spot a good trade

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In this edition of the Alpha Letter, we cover:

  • Stocks & Options: How to follow the options flow

  • Real Estate: Are private prisons a good investment?

Stocks & Options - How to Follow the Option Flow

Following the option flow is an increasingly popular trading strategy. We’ve teamed up with a company called vigtec to help us incorporate option flows into the newsletter so that you can hopefully gain an edge.

Check out their app here - there’s a 7 day free trial. I highly recommend checking out the incredible amount of data they have, as they’ll be helping us with content going forward. 

The bubble chart above gives us an overview of the option market activity for Thursday. The size of each bubble represents the total premium traded, and the color of each bubble is based on how bullish the activity was for each stock or index. 

Here’s a more detailed look into the top six names on that chart:

This overview of the market won’t give us specific trading ideas, but I like to quickly check it a couple times per day in order to gauge where the market is.

The last couple of weeks have been overwhelmingly green in terms of option activity - more bearish activity is definitely something to watch for.

In order to find more specific trade ideas, we need to dig deeper. In general, I like to figure out which stocks have extremely low put/call ratios with high trading volume. This tells me that traders are buying calls at a rapid pace. 

Vigtec has a scan called “On Fire Calls” that shows me specific call contracts that are trading at least double the volume compared to their 10 day average volume.

While I wouldn’t blindly buy up every call on this list, it’s a great starting point for deciding what to trade. 

One name I saw many times on the list for Thursday was Lyft. All of the rideshare and food delivery companies fell sharply on Thursday after the US Labor Secretary said that gig workers should be classified as employees. 

Lyft fell the hardest, dipping nearly 10%. While this is horrible news for the industry, the sell-off for Lyft may have been too harsh. Stocks usually bounce back after steep declines like this - especially when the bad news is just hypothetical (the US has not taken any formal action to act on the above declaration, after all).

Another scan I like to use is “Roaring Kitty Calls”. It finds call options trading at 5x their 10-day average volume among momentum stocks. This is a great scan if you’re looking for quick momentum plays to take advantage of.

One name that popped up several times on this scanner Thursday afternoon was Snap. I’m usually interested in watching Snap since it’s done so well recently. 

While you never know for sure why others enter are trading, extremely asymmetrical call volume (compared to puts) could be a sign that somebody (or a group of somebodies) are very confident in the stock. Snap’s call volume was almost 10 times put volume on Thursday. When measured in terms of premium traded, calls were traded nearly 20 times as much as puts. 

Again, this data all comes from our friends at vigtec. Get a 7 day free trial of their Options Matrix app by clicking here.

Real Estate

This thread about private prison investing caught our eye yesterday:

Are private prisons a good investment? 

There are a few publicly-traded prison stocks available, like Core-Mark Holding Company (CORE) and The GEO Group (GEO). While we may cover those names in a future edition of our premium newsletter, I wanted to look at a privately-owned one today.

I found an interesting piece of land for sale in the California desert: A 30 acre piece of land with a 282-bed prison and 30 single-family homes. 

The prison is currently unoccupied but 21 of the 30 homes are rented. The homes were presumably built for staff members of the prison, but could be rented out. The listing page also suggest that someone could convert the property into an Airbnb rental community, given that it’s right on the highway between LA and Las Vegas.

Converting the prison itself to Airbnb dorms would likely be very expensive - and probably not very appealing to potential guests.

Putting the prison back to use would be the most logical step. Securing a government contract to house prisoners could be a lengthy process, but that contract would be lengthy and most likely very lucrative once locked in. California spent over $64,000 per prisoner in 2015.

Another factor to consider is the political climate. More liberal states like California have been working to decriminalize marijuana and rely less on prisons in the criminal justice system. Of course this isn’t a deal breaker but should be considered. 

Alpha Thought

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