Transcription
What's up Traders and welcome back to another Bullish Bears video. Today, we're diving into two powerful tools on Quant Data: the Net Flow and Net Drift. These tools give you an inside look at the options market, helping you understand not only the volume of trades happening but the conviction behind these trades as well.
We'll break down exactly what Net Flow and Net Drift are, how they differ, and how you could use them to sharpen your trading strategy. So, let's get into it.
So, what is Net Flow volume? Net Flow refers to the difference between the total volume of call and put contracts. It gives traders an insight into market sentiment based on the overall trading volume.
How is the Net Flow calculated? The Net Flow is calculated by taking the call volume and subtracting the put volume. We have a positive Net Flow if there are more calls, giving us a bullish sentiment, and we have a negative Net Flow, meaning we have more puts, and we're in a bearish sentiment.
What is the significance of this tool? A high Net Flow might indicate strong market interest in a particular direction, either bullish or bearish. It is a very useful tool for identifying shifts in sentiment and potential reversals, and it should be used in combination with other data points for confirmation, such as the Net Drift tool.
So, now that we understand Net Flow, what is the Net Drift premium? The Net Drift represents the net difference in the total premium spent on call and put options, and it reflects the capital flow and trader conviction.
How is the Net Drift calculated? The Net Drift is the call premium minus the put premium. A positive Net Drift means there is more money spent on calls, giving us a bullish conviction, and a negative Net Drift means there's more money spent on puts, giving us a bearish conviction.
Now, what is the significance of the Net Drift? Premiums show where large traders are allocating capital, often indicating higher confidence in these levels. Net Drift can confirm or contradict with Net Flow. For example, higher call volume but lower premium spent might indicate weaker conviction, and it helps to distinguish between the noise (which is the volume) and the conviction (which is the premium).
Now that we understand what Net Flow and Net Drift are, what are they in correlation with each other? The Net Flow measures volume, which is the number of contracts traded. The Net Drift measures premium, which is the capital spent on those contracts. The volume, being the Net Flow, shows interest or attention on a stock or option, and the premium, or Net Drift, shows trader conviction and willingness to invest capital. When combined, high Net Flow with high Net Drift signals strong sentiment with solid conviction. Discrepancies like high flow but low drift may indicate weaker conviction or hedging activity.
Now, let's take a look at the actual platform and really get used to these tools. The first thing we're going to do is come to our V3 Quant Data. We're going to come up to Dashboard and we're going to Flow Analysis. At this point, your screen will look something like this. This is the basic loadout. You have Net Flow on the top left, Net Drift on the top right, and you have your Net Premium Heat Map on the bottom. For this video, I'm going to be moving the heat map lower so we could really focus on the two tools at hand.
Before we get into how to use these tools, I want to go over the settings and what exactly we're looking at so you guys have a bit of a clearer understanding. The first thing we see is we have our Net Flow volume on our left-hand side and our Net Drift premium on our right. We have our calls in green, our puts in red, and we have our underlying asset, which is the SPY, as the blue price in the background with SPY's price on the right-hand side. That is on both charts.
Now, if you don't want the underlying price or the underlying asset, you can turn that off to get a bit of a clearer picture, but it does sort of help to understand where these spikes were executed and at what point and how did the market react to these spikes. And it's really great to use both tools, Net Flow and Net Drift, because we could see that SPY right here tried to make a high, although the call volume was going lower and pushed below our zero line, and the put volume was pushing higher. So, even though we broke a new high of day here, retail traders might not be aware that the call and put volume has just switched. So, anybody might be chasing longs going high. However, they failed to realize the order flow in the market has reversed and has gone into a bearish sentiment. We had a very strong drop coming around 10:41. We had price start to pick up, volume start to pick up. 10:46, we continued this drop for quite some time, really a strong move to the downside on the SPY there. A lot of members in our community at Bullish Bears were able to capitalize on this because we have tools such as Quant Data.
Now, let's get into some more specifics of the tool, and I'm talking about all of these different types of settings and filters that Quant Data offers. Now, for Session Date, you could keep this clear, and it will give you the most recent date or today's price action. But for this video, we're going to be doing September 5th, 2024. The Money just tells me if I want at-the-money, in-the-money, or out-of-the-money. The Side tells me if I want above ask, ask mid-market, bid, or below the bid. And then we have our Filter Groups.
Now, Quant Data has recently added a ton of filters to help make our trading that much better. The only filter group I currently have is Filter Trades where complex trades are excluded and tied trades are excluded, and I like to use this filter on both of the tools shown above. Now, with this group, we're going to click it, we're going to come down to Activate, and what that's going to do is it's going to activate that filter on my chart, and I could then come over to my Net Drift and do the same thing. I click the filter, I come down to Activate, and now we have a bit of a different chart because it's filtering out some specific trades.
In this section, we're going to go over an example of how to use Net Drift when trading something like the SPY. So, the first thing we're going to do is we're looking at a 15-minute time frame. This is for a pre-market analysis. This will be a market open right here at $559.6, and the first thing I want to do is mark out previous day highs and pivots. So, this is a 15-minute chart, and the first thing I see is that previous day rejected a previous high. So, I'm going to look for a similar type of move. So, because we are making lower highs, I might want to look for a reaction or rejection off of this $553.10 level. What I also might look for is for sellers to start to pick up or buyers to start to fail at this level.
Now, I'm going to break it down to a 5-minute time frame and we're going to play it out on the replay system to see how the market wants to move and react to those levels. So, as we see the market opened up, instantly we have some pretty good buying pressure. We come right up to the level of interest that we were watching, and we did get a bit of a reaction off of it. So far, this wouldn't be our entry. We don't have much confirmation, and at this point, at 10:00, the call volume is high, put volume is low. There's still no reason to take any shorts at this point. We do get a pullback from our zone, but we haven't gotten that signal that's saying sellers are starting to step in just yet.
Right here is 10:15. 10:15 on our Net Drift is about right here, and we do see that calls, the buyers are starting to fade away. Buyers are starting to sell their call positions. Sellers are starting to step up with their puts. So, we see that even though the market is still trying to push higher and we'll see another run at these highs, we have our Net Drift telling us that there's a good chance we're going to fail these highs. We made a new high of day right here. We're already starting to reject at this point. This is the 10:25 candle. We're looking at this is the 10:25 candle here on the Net Drift, and of course, we won't have the full chart mapped out in front of us when we're trading. We will only have up to that point, but when we have up to that point, we will still have this data.
So, because this data is starting to cross over, we're rejecting a level that I wanted to see a rejection, and the overall market has been bearish, I can then look for a short position on the next rejection with buyers getting weaker, sellers getting stronger, and us failing to hold above that high. I could then look to grab liquidity of pre-market lows and we could look to take almost a 4.5 to 1 risk to reward on this trade. We can then play it out to see if sellers do want to step in. We hesitate for a moment, and then we finally get a strong drop breaking this upper range from this level.
So, now that we got the break, what tells us if we should hold this trade or not? Well, the first thing is our reason for entry. Our reason for entry is a higher time frame bias, which usually means we should be trying to day trade that. Plus, we're rejecting these highs. A lot of times, we will sweep the highs just to run to the lows because the market needs that liquidity before giving us an initial move. So, now that we grabbed some highs, we can also look for something like an SMT divergence or anything else price action-wise. But in this video, we're going over Quant Data, and what would have kept us in this trade is the fact that the call volume continued to push lower and the put volume continued to push higher. So, that would give us the confirmation to hold this trade until it hits our target. We see another strong one-minute candle. We see the volume lower on the sub-chart is much stronger again, and we come back to our Net Drift, and what do we see? Our volume on the Net Drift on the bottom chart shows that it is now pushing red. It is 11:01 right here. It is still only 10:50 on this candle, but as we see, we continue with a lot of strength, and we then hit our target and get a reaction off of that target.
So, Net Drift is a fantastic tool. Stick around. This next section, I'm going to go over the Net Flow. Now, because we already used the Net Drift tool and we see how this trade plays out, I'm going to show you the same trade, but I'm going to show you how we could use the Net Flow to help understand and see if we're going to trend, if we're going to fail the trend, or if we're in a range. So, of course, we see that we come to these highs. We know that we end up failing these highs. This is again at 10:25. This is the full trading day on Net Flow. What we're going to do is come down to the section here, and we're going to zoom it in so we could sort of focus more on what we're looking at here.
So, at these highs, something I do want to note is just like we saw with the Net Drift, the volume is starting to get a lot lower. The selling volume is starting to increase while the buying volume is starting to decrease. Because of this, and even at this high right here, we see volume is very weak. We should see another strong spike at highs, just like we see something right here. Because we don't have that, and because the Net Drift is also starting to push bearish, this is what gives us that confluence to say, "Okay, the Net Flow is starting to get weaker to the buy side, the Net Drift is starting to get stronger to the sell side." These two tools are now helping each other and helping me find a higher probability trade, directional trade setup, and so on. So, again, it's just really fantastic to use these tools together to get some higher confluence.
That's a wrap on today's breakdown of Net Flow and Net Drift on Quant Data. I hope you found this video helpful and understand these tools that much better. If you enjoyed the video, don't forget to hit that like and subscribe button for more in-depth trading education from Bullish Bears. And as always, if you have any questions or want to see more content on specific tools, drop a comment below.