Dear Traders,

When I was a market maker on the floor, my primary job was to… well, make markets.

My real job was to make money.

Allegedly, we did that by capturing the bid-ask spread (the small gap between what a market maker pays for an option and what he sells it for).

On a day-to-day basis, that spread really does give a trader a baseline to make money. Citadel and a few other firms have cornered market making to the point that the spread is all they want.

For most traders, that's not where the real money comes from. We had our biggest wins following order flow (watching who's buying, who's selling, and how big they're going). It was a hard lesson, and it took me some time to learn it.

I got my first lesson early on from a Smith Barney broker named Artie. Other market makers sometimes called him the widow maker.

He came in looking to buy a bunch of puts (bets that a stock will fall). Within minutes, the stock was down more than a dollar. He did this to me about five times before I finally figured out what was happening (sometimes I'm not that sharp, I'll admit it).

I never traded one of those crazy in-the-money put plays (puts that already carry real value the moment you buy them) again.

The more I learned, the more I noticed that what Artie did was rare, but what Goldman did was consistent. You could sell them a call (a bet that a stock will rise), and the stock wouldn't do much for the rest of the day. But then it would either go on a two-week daily rip or gap higher over the next couple of days.

I wasn't going to fix getting run over by Goldman by simply refusing to trade with them. I noticed they were right all the time, and I realized how useful that information was to me as a trader.

I made markets. When Goldman came in to buy calls from me, I wasn't doing my job if I didn't sell them. What I learned was that I also wasn't doing my job if I didn't go out and buy more calls than I'd just sold them.

Oh, you want 500 of the 50 calls (the right to buy the stock at $50) from me? Great. I'm going to buy 500 of the 45s and 500 of the 52.5s as soon as I say "sold."

Then, when the stock invariably goes up, I'm not getting run over. It's something I still do off the floor. I track big money flow as part of just about every trade I make.

One area I never paid close attention to, but now watch like a hawk, is the order flow in LEAPS (option contracts with a long time until they expire). I kinda ignored them until I saw what my partner here at Option Pit was doing with a custom tool he built to track accumulation (big buyers quietly building positions) in long-term options.

He uses that tool along with three other main indicators to find stocks that are going to rally. He's 14 for 15 on those trades, and frankly, they've been low-stress DESPITE this market.

Come join him live today for the premiere of his research on investing with long-term options.

Your only option,

Mark Sebastian