Using Options Order Flow and Implied Volatility to Inform Equity Trades

Summary

The discussion considers whether options-market activity can provide signals for intraday equity trading. It describes a possible information-flow mechanism: informed traders may act in options before trading the underlying, particularly when short selling the stock is constrained and the news is negative. In that setting, options prices or activity could lead equity prices.

The suggested inputs include changes in implied volatility and the shape of the volatility skew. Another answer proposes treating unusually large open positions at a strike as a view about where traders expect the underlying to be at expiration. The responses offer a conceptual framework and point to academic literature, but provide no tested strategy, signal construction rules, performance evidence, or treatment of confounding factors. One respondent explicitly frames the ideas as indirect reports rather than personal strategy experience, so the claims should be read as hypotheses for further research.

Key ideas

• Options-market activity may sometimes reflect informed trading before it appears in the underlying equity.
• Negative information may be expressed first in options when short selling the stock is constrained.
• Changes in implied volatility and volatility skew are proposed as possible equity-trading inputs.
• Large open interest at a strike may reflect market participants’ expectations, but the discussion does not validate it as a predictive signal.

Tags

# trading equities on options feed/microstructure data


# trading equities on options feed/microstructure data












Obviously, not asking for a trading strategy, but do people successfully use options feed/microstructure data to trade equities intraday? What's the general framework for such strategies?

## Answer by Freddorick (score 1)

https://quant.stackexchange.com/a/26427

I am sure that some people do this. Generally, there is some evidence that informed traders choose to trade in the option markets first (Easley et.al, 1998). This is especially true if an informed trader has bad news about a short-sale constrained stock. In this case the option market leads the equity market. Moreover, I was told that there are some people that extract option implied information (e.g. steepness of the volatility skew or changes in implied volatility) and trade equities based in this. There is a lot of academic literature on this e.g. AN et.al, 2014.

I never tried these strategies myself. Option data should be provided by your broker.

## Answer by plkn (score 0)

https://quant.stackexchange.com/a/25809

The significant open position at some strike might be treated as a hope of those, who opened it that at expiration market will be there and further, so options will be in the money.

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