Before we dive into this, it is important that you understand a few things first.
The most important thing to keep in mind is that there is no fool-proof way of determining a buy or sale because in reality, there is always going to be two sides to a trade (a buyer and a seller). However, the most common way to determine if a trade is a Buy or Sale is to compare the trade price with the bid and ask prices.
Orders filled toward the ASK side are ASSUMED to be BUYS while orders filled toward the BID side are ASSUMED to be SALES.
What is a Bid Price?
To simplify things, the Bid price is the price that a buyer is willing to pay for an asset (in this case, an options contract).
What is an Ask Price?
To continue to keep it simple, the Ask price is the price that a Seller is willing to accept as payment for an asset (in this case, an options contract).
Why do the Bid and Ask matter for determining if a trade was a buy vs sale?
Think of this in terms of supply & demand. If someone REALLY wants something, they are more likely to pay what the seller is ASKing for and will likely BUY the contracts on the ASK side. If someone is currently holding a position and looking to exit, they are more likely to take what they can get from a buyer and SELL their position on the BID side. If they think their position has run it’s course, they’re likely going to set their sell order on or below the bid to avoid the risks of not getting filled as the value of the contract decreases.
What is a Bid-Ask Spread?
The Bid-Ask Spread is the difference between the highest BID price that a buyer is willing to pay and the lowest ASK price that the sellers are willing to accept. When there is a large bid-ask spread, it often indicates that there is less liquidity on that security.
What is the “Mid” Price?
The mid price is simply the midpoint between the bid and ask price. If the Bid price is $1.00 and the Ask price is $2.00, the Mid price would be $1.50.
Ok.. So now that you understand the components of Bid, Ask, Mid and a bid-ask spread, how do we use this to determine if an order is a buy or sale?
In the example below, we see an $SPX Put order.
This order was traded at a price of $40.20
The BID was: $39.90
The ASK was: $40.30
The MID would be: $40.10
This trade was ABOVE the MID but still below the ASK. This would be considered To Ask (Lean Ask). Which we would assume to be a buy.
For all of you visual learners out there, the visual below should help to understand the correlation of where the order is filled and determining buys and sale. Anything to the left of the Mid (or below the mid) is considered to be sale while anything to the right of the bid (or above the mid) is assumed to be a buy.
Understanding both sides of the market is important when trading. That's why WhaleStream lets you see "buy flow" and "sales flow" separately. Additionally, WhaleStream gives you the option to merge the buys and sales together to view all of the buys and sales together in one easy to use dashboard.
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