Four times a year, every public company reports its quarter. The report covers revenue, net income and earnings per share (EPS), and the stock usually reacts fast. Beat expectations and it can gap up. Miss them and it can drop hard before you've finished reading the headline.
That unpredictability is what makes earnings season hard to trade. One way to get a read on it ahead of time is to watch Unusual Options Activity (UOA): options trades that break from a stock's normal pattern. When well-informed participants, the so-called "smart money," position for a big move, they often do it in the options market first. This article covers how retail traders can use UOA alerts to trade earnings with better information and tighter risk.
Understanding Unusual Options Activity (UOA)
Unusual Options Activity flags contracts whose volume or open interest runs well above their historical averages. When that happens, it usually means large players, often institutions, are making a sizable bet on where the stock is headed. Sometimes that's based on better research. Sometimes it's based on information the public doesn't have yet.
What is UOA?
Think of UOA as a footprint. When a stock that normally trades a few hundred contracts a day suddenly sees thousands, someone expects something. A burst of call buying points to an expected rise. A spike in puts points the other way. The trigger can be a news event, a merger, or, most often, an upcoming earnings report.
Block Trades vs. Sweep Trades
Two kinds of trades show up again and again in unusual options activity, and they mean different things:
| Type of Trade | Description | Significance |
|---|---|---|
| Block Trades | Large, privately negotiated transactions involving a significant number of options contracts (typically over 10,000). These trades are often executed by institutional investors. | Indicate a large institutional investor taking a substantial position, suggesting a strong conviction about the stock's future direction. |
| Sweep Trades | A series of smaller trades executed almost simultaneously across multiple exchanges. These are often broken up to obscure the true size of a large order. | Suggest an urgent desire to fill a large order quickly, indicating a high level of conviction and often an expectation of an imminent price move. |
Both count as smart money signals. Somebody with real research and resources behind them is putting serious capital to work. A block tells you the size of the conviction. A sweep tells you the urgency: the buyer was willing to take whatever price each exchange offered rather than wait for a better fill.
The "Smart Money" Indicator
UOA gets called a "smart money" indicator because it shows what institutions, hedge funds and professional traders are doing. These players have better analysts and, now and then, non-public information. Tracking their options activity shows you where they're placing bets, and you can decide whether to line up with them.
There's a catch. Plenty of UOA never turns into a stock move. Big institutions often buy options to hedge a stock position, not to bet on direction. A huge put purchase might just be a fund insuring shares it already owns. So treat UOA as one input in a bigger process, never the whole process.
Why UOA Helps With Earnings Trading
Earnings season is where UOA earns its keep. The volatility is high, the timing is known, and informed money has a clear date to position around.
Anticipating Market Moves
Heavy UOA right before an earnings date tells you some traders expect a big reaction. A wave of call buying ahead of a positive surprise, for example, can mean insiders or well-informed investors expect a rally. If you see it early, you can position before the rest of the market catches on. The same logic works in reverse. Heavy put buying a few days before the report tells you someone is bracing for a miss, and that's worth knowing whether you trade the stock or just own it.
Gaining a Professional Edge
Not long ago, this kind of flow data was something only institutional desks watched. UOA alerts give individual traders the same view. Instead of relying on public news and analyst notes, you can see what large players are actually doing with their money, which is often a more honest read on sentiment than anything they say in public.
Mitigating Risk and Protecting Your Portfolio
UOA also works defensively. Say you own a stock and, the week before earnings, put buying on it suddenly surges. That can mean large players expect bad news. You now have time to act: hedge with puts of your own, trim the position, or at least go in knowing the risk. That kind of early warning matters most in the days around a report, when moves are biggest.
Strategies for Trading Earnings with UOA Alerts
Trading earnings off UOA alerts works best when you have a repeatable process and combine the flow with other analysis.
Identifying High-Conviction Trades
Some UOA matters a lot more than the rest. These are the traits that separate high-conviction trades from noise:
- Volume well above open interest. When a contract trades far more than its existing open interest, that's new money opening a position.
- Out-of-the-money (OTM) strikes, especially with short expirations. They're cheap and risky, so a big bet on them usually means someone expects a large move.
- Sweep orders. A trader splitting an order across exchanges to fill it fast is telling you they expect the move soon.
- A fit with the rest of the picture. Unusual call buying on a company with strong fundamentals makes a stronger bullish case than the same calls on a company in trouble.
Combining UOA with Technical and Fundamental Analysis
Don't trade on UOA alone. Use technical and fundamental analysis to check the signal.
On the technical side, look at chart patterns, support and resistance, and indicators like the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD). If the flow is bullish, you want to see a chart that agrees.
On the fundamental side, look at the company's financial health, its industry, and what's coming up. If the flow suggests a big move, ask what could cause it: a product launch, a regulatory approval, a guidance change. Finding a plausible catalyst makes the signal more believable and tells you more about the trade you're taking.
Practical Use Cases: Long Calls/Puts, Spreads, and Straddles
How you trade a UOA alert depends on what the flow says and how much risk you want.
When the flow shows a clear direction, like heavy call buying, the simplest play is a long call or long put. You get a lot of leverage, but time decay and the volatility crush after earnings can hurt you even if you get the direction right.
If you want defined risk, use a vertical spread. On a bullish signal, a bull call spread means buying a lower-strike call and selling a higher-strike call. It caps both your profit and your loss, which suits an expected moderate move better than an explosive one. It also takes some of the sting out of the post-earnings volatility crush, because the call you sold loses value alongside the one you bought.
Sometimes the flow points to a big move with no clear direction, such as heavy activity in both calls and puts, or a large straddle purchase. Then a long straddle (buying an ATM call and put with the same expiration) or a strangle (buying an OTM call and put) can pay off on a large move either way. Traders use these when they expect a big earnings surprise but can't call the direction. If the flow suggests the stock won't move much after the report, selling straddles or strangles can profit from the implied volatility crush that usually follows earnings.
Putting It Together for Earnings Season
The workflow is simple. Watch for Unusual Options Activity alerts in the days before a report. Tell block trades apart from sweeps. Check the signal against the chart and the fundamentals. Then pick a structure that fits the move you expect: long options for a strong directional bet, spreads for a moderate one, straddles or strangles when the size is clear but the direction isn't. The same alerts work defensively too, warning you when put buying piles up on a stock you already own.
One more layer of confirmation before you act on a pre-earnings signal: pull up the company's earnings call transcripts and check whether the direction of the unusual flow lines up with what management actually guided last quarter. The flow shows you where the smart money is positioning. The transcript shows you why.
References
- Unusual Options Activity: Insights and Strategies for Traders. moomoo.com. https://www.moomoo.com/us/learn/detail-unusual-options-activity-117647-241178077
- Unusual Options Activity Trading Strategies. trendspider.com. https://trendspider.com/learning-center/unusual-options-activity-trading-strategies/
- 7-Steps Guide to Read Unusual Options Activity. intrinio.com. https://intrinio.com/blog/how-to-read-unusual-options-activity-7-easy-steps
- How to Trade Earnings with Options: Best Strategies. tastylive.com. https://www.tastylive.com/concepts-strategies/how-to-trade-earnings-with-options