I am not a pro at reading options data, but it gives some insights into the broad direction. Here are few pointers based on my limited knowledge and usage of options data:
- Option chain data in itself is non-conclusive
- It is based on the premise that ‘big’ money prefers to sell options
- Option selling by design shifts the probability in the favour of the trader
After a trader sells options, market can (i) go in his direction (ii) go against his direction (iii) can stay rangebound around entry price … both (i) and (iii) scenarios will result in profit for the trader. Scenario (iii) is to be managed. Probability of success is already 0.67.
- I broadly look at change of OI in ITM options and few strikes away in both the directions. If the OI is increasing more on one side, option sellers are in charge and selling call/put in that direction
Change in OI higher in calls —> call sellers in charge —> Indications of market going down
Change in OI higher in puts —> put sellers in charge —> Indications of market going up
- Options data has to be looked in totality, stand alone data will not reflect anything actionable
Market moving up + Put OI increasing = Move may continue
Market moving up + Call OI increasing = Non-conclusive
Market moving down + Call OI increasing = Move may continue
Market moving down + Put OI increasing = Non-conclusive
- Option data is just an additional tool to my DP trading. Trades are identified based on the market structure as per DP guidelines, Options data can at times give insights on the move/counter-move to continue or not.
- ‘Big’ money knows that retail traders use option data to enter/confirm trades ….manipulations are pretty high.
- Open interest data can change pretty quickly. Before the reversal reflects in the data, it can happen on the charts. Also, overnight the whole data can change. I was closely following options data during the 6th Oct 2021 fall, till the market closed data did not indicate any strength in the put option selling (for market to reverse). The OI was heavily skewed on the Calls side. But the next day (weekly expiry) market gaps up 160+ points and never reversed from there.
To conclude, I am not a pro in reading options chain. But options chain is not a holy grail, as few traders (trainers) claim it to be. I have always found stand alone options data as non-conclusive. It can give a broad direction of the market based on the change in open interest. The open interest data can change pretty quickly and if I may put it that way, it is not a leading indicator. Change in price may occur faster than what reflects in options chain. Keeping a track of ITM and few strikes on both sides helps. Especially look for huge additions and huge unwinding in various strikes. At end, I see most of the traders using ‘trend’ in option chain data to identify something actionable. Thats where lies the key, ‘identifying the trend’, be it in price, options data, volume, leading/lagging indicators.
Happy Trading!!
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