Guide to Options Sweeps

By Kenny Zhu · May 22, 2023 · 7 minute read

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Guide to Options Sweeps

What Are Options Sweeps?

Options sweeps are large options trades executed by well-capitalized, typically institutional investors, quickly and across the best available order prices. When an option sweep is placed, the executing broker will hit all available counterparties, by order of best outstanding prices, until the investor-specified order size is filled.

The typical retail investor typically will not execute options sweep trades, given the massive amount of funding and leverage they entail. Instead, options sweep trades can serve as an indicator of underlying interest around a certain security. As they typically reflect institutional investor actions, option sweep trades are indicators of what the “smart money” is doing.

What an options sweep implies is up to interpretation and depends on the order size, type of option, and average price at which the options sweep was executed. We cover how options sweeps work and how retail investors should interpret them.

How Do Options Sweeps Work?

When options sweeps are executed, the trade will be visible to market participants. The details around the trade, namely its size, the type of option traded, and the approximate price of the trade, are viewable by traders with the capability to scan for them. However, the specific entity entering the trade and the order type (whether it’s a buy or sell) will not be disclosed.

Option sweeps aren’t really considered one of the strategies for trading options. But given the massive amount of capital needed to properly transact an options sweep, and the fact that these are typically entered as block trades, entities that use option sweeps are likely to be well-capitalized institutional investors.

Consequently, options sweeps are viewed as indicators of aggressive bets made by “smart money,” and can stir up investor interest due to the perceived informational advantage that professional money managers have over retail investors learning to trade options.

Under the right circumstances, they can provide useful insight into implied short-term price swings that large institutional investors might be hedging against. This makes it a popular tool for short-term traders.

How to Interpret Options Sweeps

Options sweeps serve as indicators of unusual options activity surrounding the underlying investment.

Options trades may imply aggressive actions by institutional investors, and traders who detect options sweeps may use them to inform their actions.

How an options sweep should be interpreted depends on the type of option being traded, its expiration date (American- and European-style options are different), and the price near where the options sweep was executed.

Regardless of what an options sweep may suggest, investors should bear in mind that institutional investors are fallible like retail investors. In other words, sometimes the “smart money” isn’t so smart. Despite the informational asymmetry, option sweeps should be interpreted with a grain of salt. Make sure to conduct your own due diligence before trading, looking at bearish or bullish stock indicators and so on.

Option Type

When a trader buys to open a call option, this generally implies a bullish bet on the price of a security, as call options offer upside potential beyond the stated strike price.

Conversely, when a trader buys to open a put option, this implies a bearish bet on the direction of the underlying security, as put options offer downside protection beyond the stated strike price.

Price

While it’s evident that a trade was made when an options sweep occurs, the trade won’t explicitly disclose whether the options were bought or sold by the institutional investor.

To gauge whether or not an options sweep was a buy or sell order, and to better understand options pricing, traders can contextualize based on whether the average execution price was traded “near the bid,” or “near the ask.”

Trades made near the bid are typically sell orders, while near the ask trades are typically buy orders. This follows the traditional trading logic of “sell at the bid” and “buy at the ask.”

Combination Trades

Not all option trades are simply buy calls or buy puts. Combination trade strategies using multiple options are very common. It might be very difficult to interpret the strategy of the option sweep investor, and even more difficult to determine if your own investing strategy aligns.

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

How to Detect Options Sweeps

Options sweeps are difficult to detect without the aid of dedicated trade scanners that monitor options flow activity.

Many third-parties and brokerage accounts that offer advanced trading capabilities may include this as part of a subscription fee, or as a part of their trading suite.

If you don’t have access to these paid programs, there are still ways to detect unusual options activity on stocks you follow.

First, options are useful hedging tools for institutional investors and are therefore typically used during times of heightened market volatility.

You can watch for open options interest on calls and puts, expiring close to earnings reports or dividend announcements. Beyond company-specific announcements, traders can often gauge options interest close to market-moving events, economic reports, or even Federal Reserve statements.

While this won’t necessarily inform the direction of an upcoming trade, it will certainly shed some light on where volatility is likely to occur as the expiration date on the options approach.

Who Uses Options Sweeps

Options sweeps are used almost exclusively by large well-capitalized institutional traders.

Due to the large amount of capital needed to execute an options sweep, and the massive risk profile that this entails, it’s unlikely that anyone without a substantially large bankroll would be able to conduct an options sweep trade.

Virtually all retail investors would be excluded from the list of candidates capable of executing options sweeps.

The Takeaway

While options sweeps are not usually executable by everyday investors, their existence still serves as a useful indicator of institutional activity.

Unusual options activity has historically been a popular short-term metric for gauging the direction of stocks. While there’s no guarantee as to the accuracy of the implied price moves, they’re nonetheless another useful tool in the arsenal for short-term options traders.

If you’re ready to try your hand at options trading, You can set up an Active Invest account and trade options online from the SoFi mobile app or through the web platform.

And if you have any questions, SoFi offers educational resources about options to learn more. SoFi doesn’t charge commissions, and members have access to complimentary financial advice from a professional.

With SoFi, user-friendly options trading is finally here.

FAQ

Are call sweeps considered bullish?

Call option sweeps are large purchases or sales of call options that can be considered either bullish or bearish, depending on the price where the trade completes.

All options trades have both a bid and an ask price; the bid price indicates the price you’d receive for selling to open the option while the ask price indicates the price you’d pay to buy to open the option.

If a call sweep is shown executing near the bid price, that means that an institutional trader likely sold a large number of call options at the bid price, which may imply a bearish signal.

Conversely, if a call sweep is shown executing near the ask price, that indicates that an institutional trader likely purchased a large number of call options at the ask price, which could imply a bullish signal.

How can you find options sweeps?

Finding options sweeps isn’t as simple as searching for trade ideas. Detecting option sweeps requires scanning software that can sleuth through public trade data for unusual options activity.

There are a number of options activity scanners available on the web and through third-party information services; in most cases, these require paid subscriptions.

Many popular online brokerage accounts also sometimes offer their own activity scanners as part of their suite of advanced trading platforms.

What does it mean for a sweep to be near the ask?

If a sweep is near the ask, this means a large sweep order was made to trade securities near the ask price.

This may be interpreted as a “bullish” signal that the stock price may rise in the short term.


Photo credit: iStock/Drazen Zigic

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Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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