Follow the Smart Money Review: Unusual Options Activity

Jon and Pete Najarian are well known traders to CNBC viewers, and their Fast Money Halftime segment on ‘unusual options activity’ is the highest rated segment of the day on CNBC.

The Najarian brothers recently started airing ads touting their new book and DVD called ‘Follow the Smart Money’. It’s ‘free’ except you have to pay for shipping which ends up being around $20 (so the shipping is probably overpriced so they actually make money on book). This review will go over the contents of the book and DVD to help you decide if it has some valuable information or is just a marketing gimmick that you shouldn’t waste your time and money on.

Strategy Overview

For anyone not familiar with Jon and Pete Najarian and their trading philosophy, their basic assumption is that the big institutions have information and insights that the rest of the market doesn’t have. Sometimes it’s inside information, but often the institutions may have exclusive information they pay a lot of money for or educated guesses based on the extensive research and experience of their traders.

These institutions want to place trades based on their information edge, and they often use the options market to make their bets. The smart money often uses options because of the leverage options offer, but also because it helps them to hide their trades from their competitors, and they can structure more complicated strategies.

The Najarian brothers look for unusual volume as a clue to what trades the smart money is making then they try to deduce why they are making those trades, and then sometimes they try to follow along with the trade idea.

Book Review

We’ll discuss the book first. The book consists of 12 chapters of ~281 pages which are listed below:

1. It’s Not Really a Random Walk
2. The Inside Scoop on Inside Information
3. The Hunt for Unusual Option Activity
4. The Right F.R.A.M.E. of Mind
5. Long Calls and Puts
6. The Greeks
7. Profit and Loss Diagrams
8. Skews, Tilts, and Dangerous Smiles
9. The Stock Replacement Strategy
10. The Versatile Vertical Spread
11. The Stock Replacement Covered Call
12. Trader Tales of the ‘Unusual’ Kind

In general the book is well-written. In the first couple chapters the Najarian brothers relate some stories that help to prove their assumption that some players in the market have information that most people don’t have.

In the next couple chapters they relate how they developed their ‘Heat Seeker’ algorithm to identify unusual options activity, give some examples of some big wins they’ve had, and then give an overview of their FRAME methodology. FRAME stands for

Filter to find potential trades
Research Viability of potential trades
Analyze option markets to find best strategy
Make and manage your trade
Exit your trade

The chapter on their methodology was the most interesting to us. It doesn’t give a lot of detail or specific rules on how they trade, but it does give you enough information that you may be able to go looking for unusual option activity and develop it into a trade idea on your own if you are a somewhat experienced trader.

The rest of the book is mostly an explanation of options, how they work, what terms mean, and how to structure option trades. This part of the book is a good introduction to options for traders who are not that familiar with them, but experienced options traders might not learn much from these chapters.

Overall the book is an introduction to their strategy and options trading in general. Although it does have some good information, it is also a marketing tool to get traders interested in contacting their Investitute for further training and various services related to their strategy.

DVD Review

The DVD is 45 minutes long; it’s well produced and easy to understand.

The video goes over some of the reasons the smart money buys large numbers of options and what types of clues look for. It does have some information the book doesn’t have, especially regarding how to spot the smart money and more detail on their ‘heat seeker’ algorithm. The DVD doesn’t have a section on options and how to use them, but that is covered more than adequately in the book.

Summary

Overall, we thought there was some valuable information in the book and DVD if you’re interested in learning more about how to trade unusual option activity. But it doesn’t provide a detailed strategy or trading plan. The book also does a very good job of teaching about how options work and how to use them, although experienced traders won’t find much new information there.

To some extent the book and DVD is a marketing tool intended to get you interested in contacting the Najarians about other products and training they have. And their sales people will call you to follow up on any questions you have and to sell you on their other products.