Open interest and volume have long been indicators that speculators have relied on for future stock movements. When rumors begin flying around the Street, institutions and retail investors alike try to capitalize by buying cheap out-of-the-money options at a specific strike and expiration. Most of you reading this right now are in the comfort of your own home and not lost in the trenches of Wall Street. You have very little knowledge of any potential takeovers or great earnings announcements being whispered about. However, learning how to spot this type of option action can help you take advantage of the potential movement as well.

On the thinkorswim software platform, there is an indicator called the "Sizzle Index." It allows you to search all optionable stocks and ETF's looking for unusual options activity. You can refine this search to your own watch lists or public watch lists. As an example, when searching the Russell 1000, Archer Daniels (ADM)appears as an illustration of something that is "sizzling." ADM has earnings approaching in a little over a week and some heavy option action is taking place.

Below you will see the sizzle index on the Stock Hacker tab of the thinkorswim software. ADM is highlighted and has a "call sizzle" of $5.978. What this means is that there is almost six times average volume on ADM calls right now. That's enough to cause some curiosity!

The next step would be to look at the options to see where this irregular options activity is taking place. Highlighted below you will see today's volume and the open interest. The August 30 and 35 calls along with the September 30 calls are showing very high volume in comparison to the open interest. The August 35 calls are currently trading at a bid ask of $0.25 - $0.35. This is a very cheap option that could be a speculative gamble based upon what earnings may do in the next week.

If you want to take it a step further, you can look at the order flow of the options utilizing thinkorswim charts. Below is a five minute chart of the Aug 35 call. You can see over the last couple days that the order flow has been pretty consistent and increasing.

If you make trade decisions based on this kind of information keep your trades small, recognizing the risk of losing the entire option premium exists. However, winning every once in a while utilizing the sizzle strategy can provide you with potential big returns.
Be patient, trade smart and trade happy!

thinkorswim, Inc. does not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

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