Help understanding open interest change

V

VIXER328

Hi I am trying to understand open interest change and market direction. Can someone direct me to a site or a book I can buy that thoroughly explains open interest change and its effect on market direction?

For example, today FaceBook closed at $172. For the last 3 days open interest at the $170 and $172.5 strike has been increasing while FB price has been choppy but started moving up today. If price is increasing and call open interest is increasing, I am told that is bullish (Is that the case here?). However, if price has not breached $172.5 (and that is where the highest amount of call open interest is) is that not bearish as the high call open interest at this strike will act as resistance until it is successfully broken through?

In addition, during this same time, put open interest at the $170 strike has been increasing day after day for the past 3 days. If price is choppy with an upward bias but put open interest is increasing as well, what does that mean?


Any help is greatly appreciated
 
I have never seen a white paper with real data to support your thesis. That does not mean it does not have value. How can you tell if the trader initiated the buy or sell? How can you tell if it was part of a spread, paired with stock or against a current stock, warrant or convertible bond. Just too hard to make money that way IMO.
 
I am not positive of the thesis either but the internet and some traders I follow on youtube use OI to help predict market direction. Unfortunately, they don't give enough info, just like this (see below link) from investopedia. There does appear to be info throughout the internet indicating a correlation between open interest change and market direction...I just wish I could get more specifics, such as in the example originally noted.

http://www.investopedia.com/articles/technical/02/112002.asp
 
VIXER328 said:
Hi I am trying to understand open interest change and market direction. Can someone direct me to a site or a book I can buy that thoroughly explains open interest change and its effect on market direction?

For example, today FaceBook closed at $172. For the last 3 days open interest at the $170 and $172.5 strike has been increasing while FB price has been choppy but started moving up today. If price is increasing and call open interest is increasing, I am told that is bullish (Is that the case here?). However, if price has not breached $172.5 (and that is where the highest amount of call open interest is) is that not bearish as the high call open interest at this strike will act as resistance until it is successfully broken through?

In addition, during this same time, put open interest at the $170 strike has been increasing day after day for the past 3 days. If price is choppy with an upward bias but put open interest is increasing as well, what does that mean?


Any help is greatly appreciated
More...
I don't see Open Interest as any reliable indicator on Price Direction. Open Interest only increases when a "Buy to Open" order is met with a "Sell to Open" order since when it's a "Buy to Open" matched up with a "Sell to Close" there is no new contracts being created but rather the contract(s) simply change hands but no new ones are created.
There is no way for you to know if a Call/Put being bought/sold is bullish/bearish for the market because you don't know if that position is a hedge for a bigger position, or someone flattening out a position or if it's done as a part of a spread etc. If only it were that easy ....
 
VIXER328 said:
I am not positive of the thesis either but the internet and some traders I follow on youtube use OI to help predict market direction. Unfortunately, they don't give enough info, just like this (see below link) from investopedia. There does appear to be info throughout the internet indicating a correlation between open interest change and market direction...I just wish I could get more specifics, such as in the example originally noted.

http://www.investopedia.com/articles/technical/02/112002.asp
More...


Two thoughts:
1) Generally, "Investopedia" oversimplifies things to an inaccurate and harmful degree. But the piece you cited is about all you need to know about open interest. To look for more is to look for trouble. If you make a mountain out of a molehill, you're going to miss the mole.

2) "...that thoroughly explains open interest change and its effect on market direction?" Maybe you just wrote too quickly, but open interest has no effect on market direction -- rather, open interest is an outcome of market direction. OI is an effect, not a cause.
 
TradingDemystified said:
I don't see Open Interest as any reliable indicator on Price Direction.
More...

Ditto.

For the same reason, I find consideration of volume to be equally worthless. Important highs and lows are made on both high and low volume. Plus, we traders can't tell whether large volume/OI positions are hedged or outright.
 
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Attached are two studies from yesterday's closing SPX options, in volume and open interest.

Check out, in particular, SEP29 -- fully 20% of the PUT open interest was created yesterday -- and by recollection, I can tell you that 80% of that was done before the Trump/Democrat Harvey/Debt_Limit agreement was announced.

25% of the Oct06 puts were sold just yesterday.

Connecting the dots here is just not hard. And the implications for selling above and below the market are quite helpful.

(Sorry for the obnoxious format. I'll know for next time.
The bottom line (roughly, Row 125) is

Sep15'17 Sep22'17 Sep29'17 Oct06'17 Oct13'17 Oct20'17 )
 

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As others have pointed out open interest is not an indicator of market direction in a linear sense - like lots of open calls is bullish. The open interest could be buyers but they may also be sellers as in both cases the market maker can be the counterparty.

Having said that open interest does have effects which have been analysed. Jeff Augen in his books The Volatility Edge, Day Trading Options and Trading options at Expiration points out a number of these effects. E.g.:

  • a strike with open interest is often a resistance for a stock - if it does break through it tends to run on (in whatever direction it was) as shorts close out positions;
  • at expiration stocks will tend to pin towards the closest strike price with large open interest;
  • etc...

In this sense open interest can give an idea of direction but its always contextual. I do use it as an additional validator that my directional opinion isnt frustrated by the market. Someone else on here linked to a contributor to SeekinAlpha:

https://seekingalpha.com/article/4006500-gamma-exposure

Who uses resources of dark pools (an unstated open interest) and open interest to see where a stock might hit a hump or indeed be propelled forwards if it goes through it. The articles of these guys at squeezemetrics is interesting but I have not bought their product so I cant judge the usefulness.
 
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