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How to Profit with the Options Volume Trading Strategy

Before getting to know how to profit from the options volume using various strategies in the options market, we shall briefly understand what volume is in the context of financial trading. Further, we shall see why it is important and what are the indicators of the volume in the stock market. And finally, the strategies to use for making a profit.

What is Volume:

Volume in the context of trading defines the measurement of the trade for a specific period and security. Traders consider the options value as one of the best indicators as it provides the details of liquidity of the security in the share market. The market exchange monitors and tracks the number at the end of the day. High numbers indicate the active interest of the traders for the underlying security, and based on this matrix, options are executed. Also, when the numbers are high, and there is price change in the stock/ options, it suggests the future direction of that asset, enabling the traders to invest in that asset.

The next question you might have is where you can find the volume while trading. We are covering that part, too, from where you can get the information on volumes.

Where and how to find the volume in trading?

The majority of the stock exchanges have a record of the volume listed on their website. Thus, it can be easily accessible. There are some other ways from which you can get the details of the volume; they are as below:

  • You can get the details from reliable news websites and third-party websites that update genuine information about the stock market.

  • Traders may get this information from their brokers too.

  • Many investment platforms also show this information in the form of Candlestick chart pattern; in this chart, the green color states the buying of the options, whereas the red color signifies the selling of the options.

  • You may also find the hourly, daily, and monthly volume charts.

  • Traders can avail the volume for many financial assets such as derivatives, stocks, commodities and bonds.

What is the significance of high volume?

  • The high market volume shows buyers and sellers are more interested in the specific stock.

  • When the underlying stock is in an uptrend, and the volume also increases simultaneously, then the stock will continue to rise.

  • It represents that more buyers are interested in purchasing that stock.

  • If the stock has a downward trend and the volume increases, it will go down as it shows that more traders are interested in selling that stock.

What are the indicators of the volume in the stock market?

There are 9 types of volume indicators that can help traders in analyzing the volume of the trade. Let us see what they are:

  1. On-Balance indicator

  2. Volume RSI

  3. Volume price Trend Indicator

  4. Money Flow Index

  5. Chaikin Money flow indicator

  6. Accumulation and Distribution

  7. Ease of movement

  8. Negative Volume index

  9. Volume Weighted Average Price

As you are now clear on what the volumes are and where you can get the detail of volumes, and also the volume indicators in the stock market. Let us now move to understand the strategies to use after identifying the high or low volume in the market.

If the market conditions are good enough and the volume is high, you may get the best moves for the stocks. But the main question remains: How can you profit from the high volume? Further, why is there a high volume in certain strike prices only?

There are mainly three reasons behind the high volume of certain strike prices.

  1. News: Have you ever come across any upcoming news? It might be rumors too. Any news that can majorly impact the company's earnings, such as a new product launch. These events are big announcements, and speculators try to bet on such news increasing the stock volume.

  2. To Hedge: How can you identify that the purpose is hedging? Option buyers do not expect the market to fall, but they need to be sure and need some insurance, thus hedging their funds. So, you will see many traders coming into the market with a lot of put options to hedge the downside risk.

  3. Baby lost in the fair: The intention of saying this is that there are many beginners in the options market. They start buying a lot of Out-of-the-money options as they come cheap. Their approach is unreal and not backed by any analysis, so none of their strategies works in their favour. There is no doubt why they are not getting success.

Now, you must know the reason behind the high volume and how they look on the screen. High option volume is an outlier that exceeds the normal range of the strike prices. They can be 200% or higher volume.

One of the easiest ways to make money is to sell the options far out-of-the-money and let them expire worthless, and you keep the premium. To profit from the high-volume markets, you first need to identify the purpose, whether it is hedging, speculation or some beginners trading in the market. Once you know who these buyers and sellers are, you can make the best strategy according to that.

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