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Using Put/Call Open Interest to Predict the Rest of the Week

Posted: Mon Oct 15, 2012 6:15 pm
by oem7110
Referring to following article, I would like to know on what it means.
Does it mean which price causes the most pain, the price will get there at the Options expired date?
Does anyone have any suggestions?
Thanks in advance for any suggestions


Here’s the theory: the market conspires to cause the most pain, to cause the most number of people to lose the most amount of money. If the market is to accomplish this, what does it need to do this week?

Puts out-number calls more than 2.5-to-1, so bearish sentiment remains high.

Call OI is highest between 108 and 115 with spikes at 110, 112 and 115.

Put OI is highest from 100 to 112.

There’s some overlap in the 108-112 area, but since puts far out-number calls, let’s focus on those to determine where price needs to close Friday to cause the most pain. With SPY closing at 108.26 today, a close right here would expire about 60-70% of the puts worthless, but to really cause a lot of pain, a move to the top of the high-put-open-interest zone near 112 would be better. Hence, a move up the rest of the week is needed.

Posted: Tue Oct 16, 2012 9:32 am
by 7432
yes, that is what it means.
I'd say this is an urban legend, or some saying like 'can't win for losing,' 'sell rosh hashanah, buy yom kippur' or some such thing.
it is kind of drilled into the head of option traders and I figure some people that spent a short amount of time trading and then moved on carried the thought into their reporting(failed traders often move over to news agencies to report on markets).
I've never read a study that tested the theory.

what happens is option traders, mostly market makers, put on what are known as fair value trades or volatility spreads. you get lots of theoretical money this way, but the only way to realize the money is to trade out of the position or have the market move away from your positions and go out worthless.
when the futures get parked at your long or short strikes in the last couple weeks before expiration you get jammed and not only don't realize the theoretical money but start losing real cash money from decay or negative gamma. these situations are more memorable than all the times your positions expired out of the money so people tend to think the worst always happens.
you have a good chance to test the theory on dec grain options which for some crazy reason expire the day after thanksgiving.

Posted: Tue Oct 16, 2012 6:34 pm
by oem7110
If it works on market, it will only show a potential trend to target price before expired date, but it does not show when market moves based on this data, do you have any suggestions on how market behaviors based on this theory?
Thanks you very much for any suggestions

Posted: Wed Oct 24, 2012 1:23 pm
by mojojojo
Do you have access to option data?

If so, the week prior to expiration look at the different OI numbers for the various strike prices of that near term contract. Watch to see if the market moves toward the point that will cause the greater number of Calls or Puts to expire worthless.

If you can find reliable option data, you can back test this idea. Other than that, just watch it a few times to get a feel for how it behaves.

It's similar in theory to support/resistence levels.