Someone on television or in the print media alerts traders that a big options trade just went through. Or, perhaps you saw the trade cross on your own screen if you were watching block trades. If that trade was a big block trade of SPX calls, especially if they appeared to cross at the ask price, everyone assumes that the markets are about to take off to the upside. If it was a big block trade of puts, everyone assumes that the markets are about to tank.

Everyone might be wrong. Sometimes it's difficult for us retail traders to know whether those block trades are buy or sell trades. We might not know whether they're a directional bet or part of a complex horizontal, vertical or diagonal strategy. We can sometimes make assumptions whether the block trade was a buy or sell trade based on whether the price was nearer the bid or the ask, but even then our assumptions might be erroneous. Some of the television pundits might have connections we don't have. They might ascertain through connections to their former market making or specialist friends whether those were buy or sell trades. Even then, our assumptions about what they tell us might be erroneous.

Let's take some examples, ratcheting the trade down a bit and considering the trading that a regular retail active options trader might be making. Imagine, for example, that I've got a butterfly or iron condor trade, both of which are negative vega trades. For novices in the Greeks, that means that they'll be hurt if implied volatilities climb too much, which often happens after a steep decline. Maybe I'm a bit nervous about that possibility in the current climate. What can I do to lower that volatility risk? I can buy some positive vega by buying long options or entering a calendar trade, among other possibilities. For example, if I had a 25-contract SPX high-probability iron condor with a vega of -429.03, I could flatten that vega by buying 9 or 10 call calendars.

If I choose the calendar route, that means that I'm likely going to be selling the front-month options and buying the back-month options. Someone viewing my front-month call sell order in isolation might think I'm bearish while someone viewing my back-month call purchase in isolation might think I'm bullish. Without matching those two orders up correctly, that someone would not know that I was simply trying to flatten my vega risk. I might not have a strong opinion at all about where prices might go. I might have wanted a total portfolio makeup with both deltas and vegas that were relatively flat while keeping the theta positive so I would still benefit from time decay.

Imagine that I've bought a stock position or a LEAP position far enough in the future to simulate a stock position. Maybe I think the underlying has good prospects--the reason for buying the stock or LEAPs--but I want to generate a little income as a slight hedge against a dip in price. I decide to do that by selling calls against my long position. Again, someone viewing that call selling in isolation might think I'm bearish on that underlying while that's far from true.

Maybe I've got that same stock or LEAP position and I'm ultraconservative. I want to collar the position. Not only do I sell calls against that position, but I also use the credit that I receive to purchase an OTM put. Someone viewing that call selling or put buying in isolation might assume from either trade that I'm bearish on that underlying, but neither is true. I'm just being conservative, believing that my underlying will likely remain stable or even climb sedately. If I didn't believe that, I'd likely be selling the long position, not collaring it.

Maybe I think my underlying is going to climb at a steep pace and I don't want to risk my long position being called away due to the tax consequences in my particular case. In that circumstance, I may not want to sell calls and risk the stock being called away. I won't have any cushion at all against a dip in the long position's value. Imagine that I believe the prospects of this underlying are good, and, in fact, I've enjoyed great gains on this underlying already. It's climbed so fast that when I look at the chart, I see it's far above the strongest support. I decide to buy some insurance. I don't want to spend too much, so I elect to insure with a substantial but not fully insuring put purchase. I might buy puts at a level that allows for a 10 percent loss in the underlying but with protection that would kick in if the long position drops more than 10 percent of its value. Or perhaps I decide to buy puts for only half the long position I hold. For example, if I hold 1,000 shares, I may buy only 5 protective puts. Someone looking at that put purchase in isolation might think I'm bearish the underlying but that's far from the truth. In this imagined scenario, I'm so bullish I'm insuring only half the position. It's just-in-case insurance.

Now imagine that we're not talking about me and my imagined puny options purchases, as important and scary as they might have been to me if they had been live trades. Imagine that we're talking about a big institution with big holdings that must be protected or with varied delta and vega risks that must be hedged. I sometimes watch hedge fund people who throw on trades for no reason other than balancing these kinds of risks in their portfolio. They're looking at where the underlying can move and what might happen to implied volatilities, and deciding what they want to do to balance their risks. They're not thinking about whether their trade is a discrete and easily identifiable two-, three-, or four-legged calendar, butterfly or iron condor. Their positions may have so many legs they end up looking like centipedes. When they add a new position in those circumstances, they may be neither bullish nor bearish, but instead are concerned about managing risk.

Sometimes those big block trades we notice or hear talked about are predictive. Of course they are. The takeaway here is that we can't always know whether those first and easiest assumptions are right when a big block trade goes through, even if we know it went through near the bid or the ask. We often have no way of knowing the reasoning behind the purchase or sell of those options, and can't always match them up with a possible opposite action, perhaps in a back month trade. We can't always know which of those trades is predictive and which is nothing more than a calendar or long option position meant to balance vega risks. Even if we know for certain that a big institution is buying puts at the ask and they're not selling at another strike or time period to form a complex trade, we may not be able to ascertain whether they're so worried that they're fully hedging a position or if they're hedging only a miniscule portion.

Some proprietary platforms or well-connected former market makers and specialists may be able to connect the dots and determine what's behind the big block options trades. I've never been able to do so, and I caution you to ask questions, too, when you hear someone claim that a certain options trade has certain implications for the market.