Many hedge funds, institutions and big traders use options as a hedging tool. Given the stock market is forward-looking and stock investors are often influenced by news and rumours, I can pick up changes in market sentiments about a stock, a sector or the overall market early by monitoring unusual options activity.
A much higher than average options volume can help me to identify potential opportunities for trading. Long calls and short puts are bullish while short calls and long puts are bearish. A higher premium signifies higher implied volatility i.e. the market expects greater volatility in the stock price. A short expiration date means the trader is expecting the movement in stock price to happen very soon while a long expiration date means the opposite.
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