Options trade data has been used in a variety of ways in making many analytical drawings. We will use one such data point to analyse and get an insight into the market consensus and gauge a possibility of a fresh move.
The data point that we will look at is of Strike wise Open Interest along with ongoing Underlying price. This comparative analysis has been capable of creating a reasonable argument for a sizable move.
With options this Open Interest (OI) gets created when a new Buyer and a new Seller of that particular strike for that particular expiry comes along and creates a trade. It is a known fact that option buyer pays premium for transferring the risk of adverse premium and the seller would take that risk for the premium received.
Looking at a common analogy of Insurance Companies, we understand that the Seller of the Options (Insurance Companies) are more capable of judging the underlying risk.
Let us say the underlying is at 100 and the highest amount of OI in Calls is at 110 strike. For evaluation as well as going by the trade data, the closest expiry would have the most activity and large amount of OI.
Taking the Insurance Co analogy further, here we can see large number of Option Sellers are betting against 110 being crossed. There we have our trigger placed. Despite of a gradual rise over the course of the expiry let us say 110 still remains the highest OI Call strike.
In case now if the underlying manages to cross 110 with the same strike Call holding the highest OI, there would definitely be commotion among a large number of option sellers in that strike. There is your Trigger.
The moment the underlying starts trading or may I say, sustaining above 110, there would be unwinding attempts. Easiest way to heal this wounded Call Option Sell trade is by buying the Underlying itself. This usually creates a domino effect of accelerating momentum.
Option Sellers run for a cover by buying the underlying, which creates momentum. Momentum chasers would go behind the underlying independently pushing it even higher. This would urge the Call Option Sellers buy more for raising their cover. The entire activity ends up creating a spurt in the underlying if not a large medium-term move.
Similarly, a fall beyond heaviest Put OI strike more often than not, would create a similar momentum Trigger on the downside.
Now let us look at the actionable. In case we spot such Trigger with underlying at 111 and heaviest Call being at 110, simplest trade would be, just for a day Buy a Call option with stop loss in underlying paced around 109 to trade anticipated momentum created by the trigger.
I have seen these triggers create momentum since many years but one little thing to be careful about is that if the move beyond the heaviest strike does not sustain, the trigger could fail. Hence, the stop-loss at 109 (from our example) is also equally important.
(The author is CEO & Head of Research at Quantsapp)
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