Using our options activity algorithm to profit from a gap and go down

The put/call ratio is frequently misleading because:

1) it doesn’t take into account the price of the option being traded (i.e. total dollars risked)
2) it doesn’t take into account if the option trade is an opening (buying) or closing (selling) trade

Our proprietary option algorithm does focus on both of those telling variables. The algorithm also ignores everything in between the bid and ask, and ignores straddles, buy writes, and spreads. Trades occurring at or above the ask (most likely buying/opening trades) carry much more weight in the algorithm than trades occurring at or below the bid (most likely selling/closing trades). The dollar amounts are then kept as a running total every 15 minutes of the trading day. We also factor in the news of the day, and the setup of the daily chart.

Look at the 5 minute chart of PSMT and the running totals of options activity from our algorithm (all times PST) below.

PSMT gapped down 8% on a disappointing earnings report. The options market confirmed the gap down after the first 15 minutes of trading (zone 6c) with put buys outweighing call buys by $162,000. That was our signal to go short PSMT at $84.70 when it struggled at VWAP. We covered about 30 minutes later for a $1.00 gain.

If you aren’t following what the big money is doing, you are trading blind. To get our trades in real time off our proprietary options activity algorithm, we offer a free 7 day trial membership.