Trade 81 -What Can We Do With A Topped Out Market?

Trade 80 has gone nowhere- a flash of upside,then back down (thankfully for this trader)

Another Tool In The Chest

While we must always consider the Greeks, and ‘moneyness’ another metric is our old friend ‘open interest’ Oft times I have said that I can read more in an options chain than a chart. That does not mean I am right, but it means I have spotted something. And this week I have spotted something curious: The 7850 calls. Open interest for June is 43052, and for July 33634. This,therefore, is the most favoured strike. Why?

Stuff That Makes Sense and Stuff That doesn’t

Activity at a certain strike with a certain option may be hugely useful information. 7850 call volume is huge. Put volume? negligible- well they’d be deep in the money-why would you? Now we know this what can we do with it?

Then there is this:

Half the traders think it’s useful, the other half use it as a contrarian indicator. What does it really mean when an option is created? Remember they don’t exist until the bid or offer is met by counterparties. You sell an option, a market maker hedges that and moves on to the next trade. It’s a vote-and look how ¬†contrarian votes have worked out in recent times. So how can we vote with this open interest information?

The Price is The Driver

We haven’t got into prices yet, or a strategy. Now this is fun: buy 2 of the June calls(30.5×2) and sell one of the July calls (75) for a credit of 14.5. I will not do the ‘math’ for you but the screenshot shows we have delta in our favour, but theta is ugly. Therefore we want a quick result. A sideways drifting market is NOT good for this trade, and we have had some price action recently. This is pure speculation but if the market tanks we could get most of our credit to keep. Any takers?


Filed Under: StrategiesWeekly Trade Idea

About the Author: First found out about options in 1995.From the arcane magazine Exchange and Mart! First trade- a covered call on VOD in 1999. Made 10%,VOD almost doubled. That's when I realised I was not a good trader,and I was forgiven thanks to the amazing world of exchange traded options

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