Capturing Equity Movements With Open Option Interest

[BeanGainClovis]

This is going to be a shorter one, as most of the idea is explained in this paper:

https://core.ac.uk/download/pdf/143890986.pdf

This research is based on the German stock market (DAX 30), but it applies just as well to the US stock market or any other market.

The idea is that the total number of option contracts at each price, otherwise known as open interest, is a strong forecast of future price movements.

This idea works well in any market that provides option contracts, including stocks, currency, and commodities.

When you see large option volume, that means a wealthy investor is preparing to spend a lot of money on the index or a specific instrument.

If you can catch this market volume as it happens, before the market reacts, you can jump in with them and essentially ride the gravy train.

However, in-the-money puts are a better indicator of future movements. Large call volume may be used to hedge risk.

Remember that options are often used to hedge risk versus obtaining directional leverage.

This means that large option volume can often be a simple hedging of risk and not a sign of a corresponding directional movement.

There is no "silver bullet". This is very useful, but every investment involves risk.

Just as with any other trading idea, it's important to research and test your data before taking on any real risk.

Here is a useful site that finds unusual option activity for you to analyze.

https://marketchameleon.com/Reports/...onVolumeReport

This is easily the most profitable advice that I can give anyone in equity markets.

If you are an outsider, tracking derivative volume is the best chance you have of catching large moves as they happen.

[BeanGainClovis]

Here is an example, just to demonstrate the power of this idea.

In the last 90 days, Atlassian Corporation PLC or TEAM has seen an unusual open interest of 15,284 contracts, 64% of which are calls.

That means investors bought options to purchase 978,176 shares for a total buying volume of $294 million based on the average price for today so far.

Now people preparing to spend $294 million on a stock is going to have an effect on price, and here is the effect it had.



This 30% leap occurred between open trading hours, so call buyers simply exercised their contracts directly at the open of the market.

You can see that the price literally went vertical. The key here is to catch the option activity before the movement occurs.

Institutional traders that can throw around this much volume will often take advantage of off-hour movements.

The catalyst for this event was supposedly the shareholder meeting with AMC on July 29th.

This is listed in the Market Chameleon site as the current top entry.

If you remember from earlier, earnings reports are great indicators of future equity movements.

They are often strategically released just before or after market hours in order to protect the stock price.

However, if the large movement has already occurred, you may be too late to have a competitive edge.

The key to capturing large movements is a competitive edge, and there are many ways to get this edge.

Personally, volume analysis is my main method for analyzing large movements, and I don't think I can share any ideas more useful than this.

[BeanGainClovis]

This is my last thread here, I hope these threads have given you some ideas in how succeed in equity markets.

These are just tools, what's important is how you use them.

These ideas require a lot of work to use properly.

Live testing and historical research are necessary to make the most of them.

However, for dedicated investors, these ideas are enough of a launching point for success in the stock market.

There is no such thing as easy money in markets, even insights like these require legwork to successfully apply.

All I ask in return to anyone who really applies these ideas to make hard-earned profits is this:

Please pay it forward and remember to give generously to those who are less fortunate.