How to Trade High Volume Call Options for Profit
Volume is the amount of buying and selling of a security and it can be measured for stocks, futures, options and other investments. Options are derivatives that are traded between investors and act as contracts that grant an "option" to buy shares of stock at a specified strike price and scheduled date. Calls are a type of option that positions investors to profit from a rise in the stock's price. Investors can monitor options for high-volume levels, as these can sometimes indicate a buying opportunity. Options that are near profitability trade at the highest volume.
Call and Put Options
Options are traded by investors who want to speculate on the future price of a stock or hedge their investments against losses or sudden market changes. Options can be risky investments that are often traded by advanced and sophisticated investors. There are two major type of option contracts. Investors generally buy "call" options when they believe the underlying stock will rise. "Put" options position investors for a drop in the stock price.
Options Chain Data
As with stocks, markets track the volume of options traded during each session. Volume is listed on an options chain, which is how options pricing data is delivered on the exchanges and with financial information and news services. An options chain lists the prices and other trading information for each contract under the strike date. Information in the chain includes the strike price, last price of the option, current bid and ask price, percentage of price change, the volume of trades made and the open interest, which is the number of open contracts for that strike price and date.
Volume and Liquidity
Trading volume is vital for short-term options traders and all options traders can gain insight from monitoring the number or trades made for an option contract. An option with high volume gives it liquidity, which gives investors more opportunity to sell their options and close their position at the price they seek. Options trading at low volume can suffer from "slippage," which is the difference between the price at which the investor wants to sell the option and the price at which the trade is executed, according to Optionetics. Slippage is the result of too few buyers.
Unusually high trading volumes can indicate a buying opportunity, according to The Options Playbook. Options trade at higher volumes when the strike price is close to the current market price, as they are more likely to expire "in the money." An option trading at 200 percent or more than similar strike prices signals unusually high volume, according to Option Alpha. Trading volume can be high because of news events, such as earnings or product launches, or from hedging by institutional investors. When these events can't discount the volume, it may signal that investors have reasons to be optimistic about the options and could be a buying opportunity.
Terry Lane has been a journalist and writer since 1997. He has both covered, and worked for, members of Congress and has helped legislators and executives publish op-eds in the “Wall Street Journal,” “National Journal” and “Politico." He earned a Bachelor of Science in journalism from the University of Florida.