does option spread actually tell you direction of price?

I am going to share something that some or many of you may not agree. I studied deeply the effect of options spread OI (Open Interest) on price movement, away from expiry and near the expiry. And this conclusion is what I have come to believe:-

1. 

Open interest has no effect on price movement. It shows the interest of number of players. It may serve as a mass reaction level, but it has no effect on price movement or direction. 

Reason? 

Option writers/operators are only interested in the premium. Any strike price a retail trader wants, they will happily write a cheque and sell that option. whatever strike price! whatever quantity! 

The secret is that operators have written all strike prices from the floor to the sky. They know, even if the price moves, their loss of intrinsic value will be offset by the gain in the intrinsic value of the other option (put or call). They are not bothered by the strike price, only the premium. Whichever way the market goes, they make money via premium. They are not after intrinsic value per se. For that, they buy cash or futures imho. So, all this noise about strike price OI barrier is an eyewash and a distraction. Otherwise how do you explain big moves on expiry day? Every once in a while, you see 5 rupee call becoming 150 or 300, piercing through the OI thick walls. 

Markets move options, not the other way around. If the market has to move, operators will drag the options, period.

2. So, what actually matters in options spreads? It is the premium.  That too, you can't use to guess the direction. operators start with a "predetermined" premium of at-the-money option and work the rest premium on both sides. Thereafter they keep increasing the premium the side the herd rushes and keep crashing or maintaining the rest. 

Even a broken clock shows the correct time twice a day.

the mercy of operator

markets give you next pain only when you have forgotten the previous one. so never forget your pain...self talk.

if market is applying savlon to your wounds, be alert.

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you may not know what the market is going to do, but you can definitely react to what the market has overdone. and overdo it definitely does as part of the game to trap/confuse/bluff.

markets and politics

markets are part of politics...look at US markets...no president gets elected/reelected, if markets dont do well.... when trump demanded rate cut last month, the almost sure rate cut was delayed by the Fed as they wanted to cut it for the incumbant president but didn't want it to be done coinciding with trump demand

andre minassian, my idol, has openly said it time and again. he never uses charts, but trades on the basis of understanding chess position and vested interests. i strongly recommend his interview series given to ukspreadbetting.... he has given almost no interview before or after, but in this series, he has spilled all beans

https://youtu.be/VUtp5KVR09o?si=3l6GEPzzWhfKQSrL

don't fear btst/stbt

 i have seen that many traders avoid taking overnight positions. they fear btst or stbt.

while i respect their logic or decision, i am of the strong opinion that btst or stbt are the best trading opportunities especially in mature markets where operators find lesser ways to shoo off not-so-dumb retail traders.

so, gap up or gap downs are the preferred modes of market moves for operators. 

you might notice, in mature markets like US, most market movements happen overnight. markets are comparatively quieter and range bound during the trading hours.

overnight positions are good for retail traders as well for another reason. since they can't do anything while the market is closed, they can't fiddle with position due to emotions. the patience is forced. that way full outcome of trade is ensured. you don't lose more and profit less. the loss or profit is as per full potential of that trade for that time. 

everything depends upon the direction of trade taken at close. not on fundamental level, but on technical level reflected in charts. 

only caution, and a big one.... trade small quantity that you can afford to lose, with the one you can sleep with a sweet smile of cute gamble.... 

i know some fellow traders who do only btst/stbt....rest of the time.....till 3pm, say, they are free, whistling....

btst/stbt is one of the most bang-for-the-time-buck way of trading.

two more things....first, clear btst/stbt setup may not be there everyday... but then, there is no compulsion to trade. second, btst/stbt trade is not valid a few minutes before close and a few minutes after opening. out of that zone, other factors are at play.

one more bonus idea...if the btst/stbt outcome is still a negative surprise, the move post that pro-trend may be tried.

just sharing my thoughts. your discretion and expert opinion advised. those weak in technical analysis shouldn't attempt btst/stbt. 

sitting tight in trading

buy right, sit tight in trading also....

imho trading and investing are same....just a difference of time of holding....rules are same. if we trade the way we invest, we will lose less and win more.

the only visible difference is that we leverage in trade which makes all the difference in behaviour, and hence results.

reverse is also true imho. u can invest by trading methods, eg using charts. fundamentals as well as anti-fundamental-cartel-longterm-backing (like ACC in harshad mehta times) plus any other factor is reflected in the chart.

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binus thoughts...

- only by compounding one can become rich. without that only expenses can be met at best

- check all charts for trade entry decision but stick to the same one chart for exit

hedge funds hedge...simple (& decisive)

i always kept on bleeding till I started hedging.

hedging is like insurance to the trade. it costs something, but it gives safety cover. it reduces/eats from the profit but it ensures that you don't lose big plus you profit more often due to less stress and panic.

after the safety cover of hedging, i focused on better prediction of the direction in short and medium term. 

many say it can't be predicted. well, that's what operators want us to think. while it may not be possible to predict accurately or everything, like rain....but you can always find a way to predict the chances of rain vs snow
 

learning to predict better and better takes a lots of time. i once equated it in one of my articles to drug discovery. it is painful, costly, exhausting and time consuming. many don't survive that arduous journey. that's why i say to myself that surviving is crucial to winning.
 

hedging takes care of our longevity till we discover the wonder drug
 

if you want to take short positions, eg, take 200pe vs 100ce position...or similar traps....

of course, i have seen operators play premium eating games even there and it may appear that if market moves down, 200pe would gain much much less than 100ce would gain....reducing, apparently, the logic behind the trap. but that is temporary and is part of the trap....operators are desperate to get you off their side. they carry the helplessness of going against the weight of the broad macro fundamentals of companies/sectors/economies.
 

master any 1-2 indicators and mix them with game theory....observe the historic moves over different time lines and start betting small in hedges....that's a good path to pro-trading imho....
 

you have to do Ph.D. in 1-2 indicators than matriculation in 10. no wonder, the richest funds and operators are called "hedge funds".

my (near) final verdict on the trading game

# markets are not random. they are made to look like one but they aren't.

# the game is all about disguised accumulation and distribution.

# operators are ghosts but not myths. they are the driving force while the masses are the fuel. overwhelming cash or stock muscle weight is balanced by volatility momentum in this great flywheel mechanism.

# fundamentals are scapegoats, excuses, and script around which all movie is shot.

# the only way a trader can play this game is by not panicking. you panic and you become a victim. and for that, you need understanding and money management. and when i say understanding, i mean cracking the code.

(will keep adding as and when i recall more)

the game we shouldn't play, at least that way...

nobody will buy options if there were no leverage and only premium....who would need it then?

these were cleverly created to make profit form those who were otherwise not getting trapped and were otherwise difficult to beat. this way, through options they would potentially stand to lose via premium erosion even if they were not in the wrong trade direction.

and guess who gets naturally lured into buying options? those who have less money and/or want to get "rich" fast. options trading is a legal drug.

....small traders...millions of them...in herds....pan continents

the operators tried giving tickets of futures also, at small margins as an alternative to options (in fact, if i am not wrong, futures came earlier than options), but they have now started folding up the scale of the spread of the futures products as it lured lesser people than the genius options, scared more besides being constantly under the government and watchdog eyes for being politically and economically too risky for the returns

the game is overwhelmingly tilted towards option writers. and, mind you, not everyone can or should write options. just because you have the money to sell one or more option lots doesn't mean it is for you. if it is not for you, going the writing way is like being 100 times bigger fool and prey than an option buyer.

only "they" can and should write....

when f&o were not there, only way to beat the masses (though the numbers of traders then were far lower than those today) was in pure price volatility, on real and imaginary pretexts. as economic prosperity became more and more luring and desirable but less achievable, masses got started getting attracted towards stock markets. the invention of f&o made this possible. infact, these were created in first place to tap that potential casino market.

the best way to avoid this fatal slow poison trap is not only not to write options but also not to buy these. even if you are right in getting the direction right, you will eventually lose. i bet and i can prove it. because premium erosion is not the only trap. there are more traps lined behind it. including illogical surprise moves or lack of any.

not just f&o, every kind of leverage is poison including intraday margin. all are traps masked with mouthwatering "opportunity" promise to make a fortune with so less...

if you still want to do options you stand no chance if you don't have a very solid trading system which can fairly accurately predict portion or pattern of price movement with amazing dependable repeatability. many may think that they have got such a system but more often they are tragically betrayed by it.

besides such a "really loyal" system, you need immense patience to accept the unending delay in your becoming a millionaire (or billionaire) from the debt ridden tie-wearing failed masked mortal with injured ego you are (oops...sorry)

not that people are not getting their market calls right. in fact, many are....more and more traders in the world are beginning to crack  a part of the puzzle (though the overall %age is till miniscule). but despite getting it right they book profit too soon for fear of losing because of guaranteed unexpected surprise moves, or booking loss too late. this may sound like a cliche' but this is true with everyone. it is bot stupid and therein lies the tragedy of success of this trap.

this is the single biggest factor of masses being on continuous losing side despite their knowledge and skill.

so what's the message here?

1. i am not asking you to stop trading. half of the world is into trading...incl. potatoes, mobiles, souls, bodies and what not. trading is essential and good. but stop trading leverage. trade with what you have. earn, beg, borrow, steal the principal from somewhere (pardon the slang) but don't trade leverage. atleast, for heaven's sake, reduce it.

2. avoid the cake laced with the cream or honey poison of "premium". premium is the sign to look for. minor premium is ok. but anything more than a "small" premium is shady.

3. trade only clear cut opportunities. otherwise stay out, till you identify one. spend a lots of time in the jungle to identify the real non-fake opportunities. real opportunities don't look like one, except to a very trained seasoned eye. go the long route.

(decide what is "small" for you)

4. once you know that you have taken the right trade, hold onto the trade and don't get bluffed or ejected even if you were to lose big. that's why i say everything depends on the accuracy of your trading method and that's why i say trade only that big which is perfectly ok for you to lose all.

5. ignore the short term volatility, try to figure out (though system) what they are trying to achieve in the medium to long term. where are they taking the market. i know 99% still won't get it. if 99% get it, the operators will change the game to make sure only 1% get the ne version. but atleast, here's your and our chance to try to be in that 1%.

in the end i would say two lines....trade like you were a potato trader....play the trading game, don't trade the trade.

it's ok!

Even operators can't book profits at every corner just because they can't fold up and end the market at all points, at all corners, and go home. 

In fact they can't fold up the market at any given time. 

All profits are notional for the market operators as well. 

They miss all the profits they miss because of their inability to book.  

Therefore, the retail traders shouldn't mind if they are unable to take out more than a bucket from the ocean. 

...it's okay.

heavenly chat with a guru

Js: Traders fed up with the rise a few days ago are fed up with fall now...

Trading is a game of cycles and trends.

Without cycles and trends, big players can't make money

Krish: This means human nature is always predictable?

Js: i would say that in a slightly different way...human schemes and the response to those schemes by other humans are always predictable. in fact, as legendary strategy gurus al ries and jack trout say, humans can't tolerate confusion. whether the operator or traders, the ruler or the ruled....all are predictable while trying to avoid confusion.

it's just that many times, clever men complicate, disguise, or camouflage things in such a way that the masses start thinking as if the confusion is really incomprehensible.

Krish: So that means, market reaching equilibrium too is non-acceptable.

Js: if an expert is at the driving seat of the operators or the establishment, it is almost surety that the confusion is just an encoding or encryption of some degree. because the moment confusion goes out of hand, empires and schemes crumble like a pack of cards....

equilibrium is the truth dead clocks kiss twice every day but hate it.

it is all a game and hence can be played. you only have to refuse to believe that you can't understand it. because you can.

it is all fixed and rigged.....beautifully and mathematically

Krish: As they say, there are patterns in the chaos too.

Js: yes....chaos too is a pattern...whenever you are sure that a pattern is emerging, you can be sure that it will change.....anyways, humans can't survive the chaos, including the operators. and as long as humans are controlling the algos of their trading machines we can rest assured that chaos can't be true.

Js: but the day, computers take over from their masters, assuring them profits in return at all cost, wild moves will be common and markets will die because a billion sheep will lose the attraction to the slaughterhouse.

Js: a trader may not earn even a rupee in the market all his life, but he can never lose love of life if only he ensures that he doesn't lose more than he can afford to....

Krish: That's so true, what maximum then they can do is, create an illusion of chaos to that perfection that it becomes so hard to crack by the same organization that created it..only the elite has the key to keep changing this pattern?

Js: such is the life giving quality of the markets.....

the illusion of chaos...yes....

that's the challenge, that's the hint....to crack the code

Krish: Mass is been fed with this narrative simultaneously to create another confusion.

Js: o yes...bullseye

Js: all tv's, books, videos, etc are all crimes by the innocent, on the innocent

Krish: An illusion becomes belief if taken on an everyday basis, so no wonder it becomes addictive too

Js: but you can't fight them, convince them, upset their cart, damage their dhandha or change their mindset.....and why do it.....as i often say....never argue the system, short it

absolutely

and we start loving the illusion. so much so that we are ready to die defending it

markets are mini-universe

markets only magnify what we truly are.....to horrible multiples

Krish: True, deep down this illusion has its base on the "fear" factor of masses. That's the only emotion that can be kindled with a few extra million out of their profit kitty.

Js: yes

greed too is the vengeance of the fear

a fearless man can be rarely greedy

a greedy man will often be fearful

the belle

one of my trader friends from Chennai "M" was in the Netherlands as IT professional. we came in contact with each other through mudraa.com. what an IT buff he was. i was scared because of his daring capabilities. once he came to meet me at Shimla and stayed for over a month. he needed fast internet access. he was daring enough to hack a service provider. the reasons i am "praising" his skills lie in what i am going to share below.

one of his (even more sharp) IT pro friend "K" was in the UK, working for someone in London Stock Exchange. my friend M told me that K was always under intense surveillance...including when he called his family or friends. every movement and acquaintance was strictly as per dos and don'ts. for all this and beyond, he was paid much much more than his pass-out peers.

what was "K" doing?

well, he was the programmer (one of the team) who were asked to create and manage the Bots (robots/programs) which would be given instruction every now and then as to where to take the market or a particular stock in the next few hours or days or weeks or months....both sides

core members/experts/syndicates decide what to do and then let their (computer) jockeys take the (market/stock) horses where they want to...

...computerized accumulation and distribution at its ruthless execution.

i spent months if not years looking for the pugmarks and traces of those computer synchronized belle's...got some clues...in fact quite a few.

the races and the race of races...all are rigged.

thank God!

what operators have seen beyond covid and why

when a patient sick for 6 months get s a little better, his meals jump in quantity versus when he was sick and couldn't and didn't want to eat due to sickness. this sudden smart jump in the diet is temporary. something like our economy witnessed in october/november. 

but it will be a big mistake to fail to look beyond this temporary increase in the diet which is the initial crisis survival reaction.

the patient is recovering and by now he has just taken in the "emergency" supply as a knee-jerk, fight back natural measure to bounce from critically low levels.

as he recuperates some more and recovers from reserve and ICU levels, his body would want to stand up, get ok and go to work.

there would be a lot of weight to be gained for a normal life. it is inevitable that this deficiency suffered and accumulated for several months is overcome, systematically or in a stampede.

this is what is suspected and expected from the economy in 2021.

and since markets precede the economy by 6 months (because operators have to befool the majority and do accumulation/distribution) the current market run can be understood. it is aptly incidental that vaccines have started appearing.

correct way to decide a Stop Loss (& the logic behind 80/20 movement of price)

Stop Loss (SL) is more of a mere statutory requirement especially if conviction is sky high and risk managed eg by trade size. 

a crucial fact about SL is that a trader can't put price-SL if trade taken on pattern of technicals instead of price. SL is to be decided on the same criteria which is used to decide the trade.

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many traders either miss out or wonder why markets move 80 percent in 20 percent time and why they languish for the remaining 80 percent time.

IMHO, besides the tactical dodge critical part, another key reason is that operators take that much of time to get the sheep on or off the train...

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the judgement of direction and patience are key signs of a non-bad trader...

why sgx nifty shouldn't be taken seriously (& other thoughts)

one reason why we shouldn't take sgx too seriously. just like nifty is used to trap resident Indians, sgx is used by operators to trap retail non resident Indians or foreign traders who trade in nifty, while India is supposed to be sleeping. if Indians keep waking up restlessly to take flying arrow of sgx even at night it is serious destructive hypnotism. ultimately operators are uncles of none.

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without system, all traders are scared pigeons and innocent market fluctuations cats.

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you can't blame snakes for moving in higher highs and lower lows on trading sand.... they have to move like that... net movement of price should be seen instead of inevitable normal zig zags.... traders who don't have even that much of holding space can't stay in the ring for long.

check any graph any time line. there is good net movement despite scary zig zags

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once we realize and acknowledge that we are playing against deep monster pockets managed by super algos backed by a strategy loaded with tactics, we will trade differently. we will play the trade instead of trade the game.

where are the markets headed now?

23 march 2020

nifty : 7777
dow jones : 19160

people might be thinking that after this gigantic fall we must be near the bottom of the market. they must be anticipating a bounce.

imho, my reading of the medium term charts whispers to me that this is not the end of the bear run. the rout is not over. it is heading down and likely to get uglier. i see the "sell on rise" phase to continue till april end. the whole world of business and finance would have changed by then.

it is no ordinary bear market. notwithstanding intermittent small and medium hope bounces, it is a collapse that will result in the end of a world-order and hence will lead to a brand new order. we are heading towards a metamorphosis of the world. it is going to be chaotic and extremely painful.

while everyone is shocked and minds are frozen, holding breath waiting for the signs of the start of the end of this nightmare, it is difficult to start thinking of the possible scenario post the dust settles.

here are some likely scenarios:

* demand worldwide will collapse big time

= the recovery will be first in the essential products and services, then in the comforts followed by the luxury ones. the non-essentials will take, rather quite a long time...

* purchasing power will collapse

= one possible solution to this is to (in simple words) give everyone some money. more specifically do direct deposits in everyone's account, postpone the loan paybacks, drastically reduce the interest rates, press the accelerator on government spending (there is no dearth of projects to be taken for the next decades, just like China did a couple of decades ago), don't worry about the fiscal deficit and print money instead of worrying about tax collections, etc. though a logical and logistics nightmare for some countries, that will surely help in restarting consumption though will result in inflation. and more critically, that will defend currencies and save the banks.

* worldwide currency reset is likely to be there. what needs to  be seen is what happens to the balance between the currencies. there is expected to be a big upheaval there. currencies that will survive better will be the ones of the countries which are better prepared to stage a comeback.

* serious global supply chain disruptions and damage.

= restructuring is inevitable. new supply chains and suppliers will be hunted and created while the older non-strategic risky unviable or sub-standard ones will be dumped or left mercilessly. the fitter economies and companies will win at the cost of others which will become sick or dead.

* businesses will change hands.

= while most of the business ideas will rise from the ashes, the ones to carry-up those ideas on shoulders are likely to be different from the ones which carried them before the storm. like a rugby match, the adaptors will snatch the market from those who fail to.

* fad and luxury products and services will vanish for a long time if not forever.

* get ready for hyper-inflation scenarios as currencies and economies melt and struggle for survival. hedge with gold or crypto-currencies.

* GDPs of all countries are set for a reset in time. the expected "technical" rebound for most will be an unending wait.

* new services and products and categories will pop up.

* new world order will be as per new realities.

* unemployment will go up to draconian levels threatening law and order besides leading to medical nightmare, hunger, and misery.

permanent changes are inevitable in every arena of life. the world is about to make way for a new one.

welcome to the renovation! in fact, innovation!

it is a brutal global disruption and extends beyond just money.

by the way, it is all man-made. many out there aren't surprised. in fact, they know it is all happening to a script, rather perfectly!

why traders lose most of the time

a very amusing fact always perplexed me till i found my own answer to it.

the dilemma is this : markets can either go up or down. a trader can only be long or short. this makes it 50% assured chance of winning. then how come traders not winning at least 50% of the time and how come 90% (if not more) of the traders losing 90% of the time (if not more)!

well, the following is my explanation to myself (to the extent i have been able to decipher it)

reason 1 : traders avoid seemingly "losing trades" which, in reality, are actually not "losing" setups. this accounts for 50% of the trading opportunities for the eyeballs and brains...out-rightly missed.

reason 2 : traders lop-up the seemingly "winning trades" which are actually "set-up" traps. this accounts for the remaining 50% of the trading chances. perfect 100% open heist.

reason 3 : and if at all, the traders escape the first 2 reasons, this one traps them comprehensively. traders chicken out of profitable trades too early and get frozen in the losing trades. and those who still escape, they get trapped while trying not to book profit too early and trying not to book loss too late.

these 3 perfectly explain why 97% of the traders lose and to the extent they do.

in these very reasons lie the strategy of the operators as also the solutions for the traders who want to buck the overwhelming odds of a very favourable set-up on the face of it!

most traders have a mental unwritten flexible soft approximate rough ad-hoc system.

better than having no system at all.

the only trouble is that it being mostly in the air that is where it goes amidst the psychological shocks inevitable in the market....besides remaining largely primitive because of poor chance of it being improved because of it not been in writing for scrutiny.

a loss remains mostly an experience to be forgotten and overcome instead of being a feedback for improvement and adjustment of the system.

casino royale - II

[10:30 AM, 2/14/2017]

lot of options premium to be eaten by operators. they needing range IMO                      

what better proof required than this being the 9th day within 8700-8800 nifty spot range.                      
it's a premium eating and computers controlled casino royale...

in casino, players play to win or lose, casino operators exist to erode by letting everyone come and play

they manage stocks to manage nifty. nifty in itself is nothing but a derived Mirage                      

and they have cleverly devised instruments like nifty futures and options to trade even that Mirage.... hats off                      

trading fundamentally strong stocks with signals from nifty is the only non premium losing game positional traders can play..,

the real bluff...

i am, frankly and genuinely though, v uncomfortable with this spike (today and yesterday).

long long ago, i used to divide rises of three types.....climbs, spike, shift...depending upon the angle of rise and the magnitude.

while climbs were reasonably stable, spikes were fragile and shifts (vertical ones) were rock solid. i even wrote an article on it*.

current one seems like a shift. options data also bullish. but the down rally was just half over. i was and am perplexed. but i, fortunately, always kept room for surprises/adjustments in my system.

there was no real surprise worth its salt in the past many months since i am on this version of the system, as u are witness to, but this one is.....going by the sheer magnitude and the time it took.

this may well turn out to be a non-event bluff in line with what i was expecting till noon today (49% down rally was left) but if may well turn out to be one of those occasional "re-calibration" "real bluffs".......





*http://thebestbusinessintheworld.blogspot.in/2010/02/climb-spike-and-shift-day-trading.html

the proof

left upto retail traders market can never remain in a tight range.

markets will always drift (and often stupidly, wildly, illogically, uncontrollably) if the direction and magnitude were to be decided by retail traders.

a tight range and anything and everything else is "allowed" or "ensured" by the operators IMO.

.....the mere presence of tight range (and for that matter many more interesting patterns) is a stark proof that operators exist and control the market.

bitter truth

everything in the market is predeterminded and cooked in the short to medium time frame. any untoward unforeseen event is reacted to but soon dissolved and nullified if against the original route map of the operators