Stock Option Volume Screener: How to Leverage Options Data for Smarter Trades

Let’s cut right to the chase. Understanding option volume is the key to smarter trading. It’s one thing to know how to trade stocks; it's entirely another to understand how stock option volume can provide critical insights into future price movement.

Most traders focus on the price of a stock but fail to look at the options market, where significant clues are hidden in plain sight. Why? Because options represent a derivative of the underlying stock, meaning movements in the options market can foreshadow price action in the stock itself.

Stock options are contracts that give investors the right (but not the obligation) to buy or sell shares at a specific price before an expiration date. The volume of options being traded tells a story — a story that could provide a strategic advantage to those who know how to listen.

Why Option Volume Matters

Here’s why volume data in stock options is crucial: it tells us how many contracts are being traded over a specific time period. This information, when paired with the stock's current price, opens up an opportunity to gauge market sentiment—something that goes beyond traditional technical or fundamental analysis.

Think of this: when option volume spikes in one direction (buying or selling), it’s often because institutional traders are taking a large position based on what they know. Institutions have access to more information than the average retail investor, and when they take big positions, they often know something the rest of the market doesn't. So, following the volume isn’t just smart; it’s strategic.

Volume as a Predictor

There’s an old saying in trading: “Volume precedes price.” What does this mean? When options volume surges, price action in the stock typically follows. Think of it as a precursor to market moves. If a large number of calls (bullish options) are being bought, it’s often a sign that the stock’s price may increase. Conversely, a surge in put options (bearish options) can indicate an impending decline.

For example, say stock ABC is trading at $50, but over 10,000 call options at a strike price of $55 with an expiration date one month away are suddenly bought. This surge in volume can indicate a belief in the market that the stock price will rise above $55 within the next month.

How to Use an Option Volume Screener

A stock option volume screener is a tool that allows you to filter through thousands of options contracts to find those that meet your specific criteria. This could be based on volume, open interest, expiry date, or strike price. Here's how you can start using one:

1. Set the Parameters: Focus on the volume of call and put options for a particular stock. Look for unusual activity, which could signify that something big is about to happen.
2. Compare with Open Interest: Volume without context can be misleading. That’s why comparing the volume of a particular option with its open interest (the total number of outstanding contracts) can give a fuller picture. High volume relative to open interest suggests that new positions are being initiated.
3. Track Institutional Moves: Use the screener to identify large block trades, which are often placed by institutional investors. These large orders can give you insights into where the "smart money" is flowing.
4. Evaluate Expiration Dates: Near-term expirations might indicate that a big move is imminent, while longer-term expirations could suggest strategic positioning.
5. Check the Implied Volatility: High volume often correlates with spikes in implied volatility, which measures the market’s expectations of future stock price volatility. This can be a signal that a significant price move is anticipated.

Table: Example of Option Volume Activity

Stock	Call Volume	Put Volume	Open Interest	Implied Volatility (%)	Expiry Date
XYZ	20,000	15,000	50,000	35	1 month
ABC	10,000	5,000	25,000	40	2 weeks
DEF	50,000	55,000	100,000	30	3 months

In the table above, you can see how different stocks have different levels of option activity. The one-month call volume for stock XYZ is 20,000, which, compared to its open interest, suggests a potential price increase is on the horizon. On the other hand, the higher put volume for stock DEF could indicate bearish sentiment for the stock.

Case Studies

Case Study 1: Tesla

In early 2020, before Tesla (TSLA) had a massive surge, there was significant call option volume. Traders who noticed this spike could have used it as a signal to get in early before the stock price followed suit. Noticing this option volume surge months before the news broke allowed traders to benefit significantly.

Case Study 2: GameStop

GameStop (GME) is another example. When call options on GME started to see heavy volume in late 2020, it was a sign that something big was coming. Sure enough, GME's stock price exploded in January 2021, driven by retail investors as well as institutions who had already placed their bets in the options market.

Tools for Stock Option Volume Screener

Using the right tools can make all the difference in analyzing option volume. Several platforms provide robust screeners that can be customized to filter for high-volume activity, unusual trades, and more. Some of the best tools include:

• ThinkorSwim by TD Ameritrade: Offers detailed options analytics and customizable screeners.
• Interactive Brokers: Known for its depth in derivatives trading, IBKR provides real-time volume data and filters.
• TradeStation: Another advanced platform that gives you the ability to screen based on both options and stock data.
• Finviz Elite: A popular platform for screening stocks and options, providing a user-friendly interface.

Using these platforms, you can quickly scan for volume spikes in particular options contracts, allowing you to capitalize on market-moving events before they happen.

Common Pitfalls

However, relying solely on volume can also be dangerous. Volume spikes do not guarantee price movement. They merely indicate that there is significant interest in a particular option, but that interest could be speculative or part of a larger hedging strategy.

That’s why it's essential to pair volume data with other indicators, such as price movement, volatility, and overall market conditions. Using volume in isolation can lead to false signals.

Conclusion

Mastering the stock option volume screener isn’t just for advanced traders. With the right tools and knowledge, any investor can leverage this data to make smarter trades. The key is knowing how to interpret the information and act on it.

By following volume trends, comparing with open interest, and utilizing high-quality tools, you can gain a competitive edge in the market, uncover hidden opportunities, and make informed decisions based on the behavior of institutional investors.