Friday, January 9, 2015

how options open interest hints direction of market movement

​suppose market spot is at 8000
then check 8000CE and 8000PE open interest.
let's assume these are 2500k and 3500k respectively
let's also asssume premium for both is 50 rs. and 120 rs respectively
in this scenario, assuming operators are mainly options writers, which i think is a right assumption
operators​ will like to move in the direction where they gobble up more than they shell out
in this case premium on table for 8000CE is 2500kx50=1,25,000k
vs premium on table for 8000PE=3500kx120=4,20,000k
in this case, operators will obviously want to throw 8000PE "out of money" by taking market above 8000
this way they get to eat 8000PE premium
now, 8000CE becomes in the premium becomes "in the money". operators would risk giving something from this premium to the holders of 8000CE.
thus operators have gained 420000k by losing 125000k.
thus is the direction decided or estimated from the options data as to where the market may be taken by the operators
larger the gap between the "premium on the table" at any strike level decides how strong is that gate for the operators to crash.
--
dear siva,
i have shared one of my prime learnings with u. i was always hesitant to share such advanced things fearing that operators will stop using these tactics once formulae are exposed......i think i must be acting naive by thinking this way. 

anyway, i have penned it down courtesy you. now i will archive this in my blog.

hope this learning of mine is right and not flawed

any feedback or query welcome

2 comments:

Deven Malhotra said...

Hi,

Great Info.. but i have few queries as i do see OI for Call/ puts Intraday-
1) Generally i don't look at premium. Isn't it enough that if Put OI > Call OI at 8000 (in example taken), it means more sellers - so Mkt UP?
2) NF OI also carries good weightage for mkt direction. Or do you feel only Call/put OI will suffice?
3) Doesn't premium eating will be effective more near expiry? Before expiry (for nearly 20 days), mkt can fly anywhere?

Thanks,
Deven Malhotra

autostrada said...

Very specific jagmohan ji. Also big money needs to be against consensus. If the premium in puts is higher then they would want to eat that.... essentially eat where the size is larger.... thats how big money stays big... always refreshing to read this blog