Thanks for sharing!!
Looking at option volume as indicator?
- Thread starter Cuddles
- Start date
Thanks for sharing!!
Ok so what's option volume? What's the difference between Option volume and open interest?
McMillan writes extensively about this in McMillan on Options. I don't know whether it works. His premise is that you are following in the footprints of people doing insider trades, and he presents methods for determining whether it's really an insider trade versus simply a spike in the number of people legitimately trading in the options (I think it affects some of the options rather than all of them). That is all I know. I'm far too lazy to spend the day comparing option chains.
I enjoyed a personal example of this at a previous job. A diminutive pharma company (let's call them POS) had a terrible decline in its common stock, bringing them into sub-$1 territory and probably jeopardizing their listing on NASDAQ. POS said the sale was preceded by heavy option trading, and supposedly based on no news. Since our company did a lot of business with them and had their proprietary data, they insinuated that one of our employees had made the trades. Our CEO announced to us that as requested by POS, the names and social security numbers of all our employees had been turned over to the SEC (or whatever the appropriate regulatory body was). I checked, and there was indeed a premonitory explosion in the option volume. It looked like someone knew something. That was about 8 or 9 years ago. I never heard anything more about the investigation. But there is a happy ending: POS resurrected themselves from their moribund state and were purchased by big pharma a couple of years later.
I enjoyed a personal example of this at a previous job. A diminutive pharma company (let's call them POS) had a terrible decline in its common stock, bringing them into sub-$1 territory and probably jeopardizing their listing on NASDAQ. POS said the sale was preceded by heavy option trading, and supposedly based on no news. Since our company did a lot of business with them and had their proprietary data, they insinuated that one of our employees had made the trades. Our CEO announced to us that as requested by POS, the names and social security numbers of all our employees had been turned over to the SEC (or whatever the appropriate regulatory body was). I checked, and there was indeed a premonitory explosion in the option volume. It looked like someone knew something. That was about 8 or 9 years ago. I never heard anything more about the investigation. But there is a happy ending: POS resurrected themselves from their moribund state and were purchased by big pharma a couple of years later.
You can find the answer here: http://www.investopedia.com/articles/optioninvestor/04/060904.asp
Ok that article is talking about options volume in terms of shares and did not explain at all how options trading volume, that particular number is calculated.
Anyway I found another Investopedia article that explained it a tad better: http://www.investopedia.com/ask/answers/050615/what-difference-between-open-interest-and-volume.asp
But I am still confused so the Option trading volume is always from the buy side, i.e. an option trading volume for call option is always how many call options have been bought and put options trading volume is always how many put options have been bought?
Thanks
Robert Morse
Sponsor
I would say that using option volume to determine the short term direction of an underlying is VERY hard. You have to make a number of assumptions to make it valuable.
-Was the trade initiated by the buyer or seller?
-Was it to open or close?
-Was it hedged with the underlying?
-Was it to hedge a past trade?
-Does the customer know more than I do or the market in general?
-Because the customer has a large account, does that make him better at predicting stock movement?
I know that the Najarian Brothers from CNBC use option flow to help them trade, but I also expect they are getting more "color" on "prints" that you will have access to.If you use option flow as a tool, great. As your only tool, you will find that you are jumping in after rumors and exiting after everyone else does. I would avoid that.
-Was the trade initiated by the buyer or seller?
-Was it to open or close?
-Was it hedged with the underlying?
-Was it to hedge a past trade?
-Does the customer know more than I do or the market in general?
-Because the customer has a large account, does that make him better at predicting stock movement?
I know that the Najarian Brothers from CNBC use option flow to help them trade, but I also expect they are getting more "color" on "prints" that you will have access to.If you use option flow as a tool, great. As your only tool, you will find that you are jumping in after rumors and exiting after everyone else does. I would avoid that.
Yes, this is correct.
Robert Morse
Sponsor
Not always. When you view option volume on your software, it will include the volume printed. Buy/side, sell side, not relevant. OPRA reports the volume as the exchange reports to them. If you look at volume on the OCC website, it reports contracts entered into, so it doubles all volume. http://theocc.com/webapps/volume-query.
bob
@Robert Morse does it mean that the volume I see in my software depends on the data source? Not every source is reporting the same volumes?
Robert Morse
Sponsor
No. Your software will show trade volume vs contracts. The OCC counts a buy contract and a sell contract as two, which most of us find confusing, but they charge both sides. Many traders us the OCC webiste to do research. If you do that, you have to cut those numbers in half.
As an example, I used to use the OCC volume query to see what volume was BD vs customer. As a MM, I was looking for customer volume vs a MM from another floor or off floor, laying off risk on me. Customer volume was better. A MM matching my quotes then trading with me was not a profitable. Many times they could hedge before me, as the customer volume hit them 1st.
As an example, I used to use the OCC volume query to see what volume was BD vs customer. As a MM, I was looking for customer volume vs a MM from another floor or off floor, laying off risk on me. Customer volume was better. A MM matching my quotes then trading with me was not a profitable. Many times they could hedge before me, as the customer volume hit them 1st.