Option chain tells you everything?

T

trexrade

I have a friend who trades CL oil really well. He told me that all he uses is Option chain, volume, price and momentum.

He has been trading oil for about 2 years now and averages about 30k per week. One of his best trade (best single day profit) was 133k which happened last Friday when he shorted oil CL. He told me specifically what settlement price it could be every single day which he said was according to option chain. As well he can kind of predict what price it can go to next week/or even month: (for example, last friday he said oil was gonna close around 46.8, and it did settled around there end of day; also he said oil can come down to 44.6 this week, which is about to happen because it touched around 45.1 today/monday; He even laid out what price oil could hit next year January, which he claimed to be around 30) ...........(PS: he also claimed that these numbers can change, if there is some major changes to the option chain, but right now these numbers are the way they are)

I asked him what specifically he looks at on the CL option chain. He told me it is the "volume, price change", however by looking at these data. how do you decide "settlement price end of day" or "possible price next week or even months into the future"? When I asked him these questions, he wouldn't tell me the specifics.

I found it fascinating that he said that option chain is where the market makers true intention lies, meaning whether the market makers want the price to go up or down, it tells you all in the option chain. If it is really what he claims, I wish to know exactly how to decode the option chain to find all these questions which can ultimately make my oil trades better.

I am a new oil trader myself and I would love to have any information that can improve my trading. Any help from experienced oil or futures/option traders would be greatly appreciated!
 
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trexrade said:
I have a friend who trades CL oil really well. He told me that all he uses is Option chain, volume, price and momentum.

He has been trading oil for about 2 years now and averages about 30k per week. One of his best trade (best single day profit) was 133k which happened last Friday when he shorted oil CL. He told me specifically what settlement price it could be every single day which he said was according to option chain. As well he can kind of predict what price it can go to next week/or even month: (for example, last friday he said oil was gonna close around 46.8, and it did settled around there end of day; also he said oil can come down to 44.6 this week, which is about to happen because it touched around 45.1 today/monday; He even laid out what price oil could hit next year January, which he claimed to be around 30) ...........(PS: he also claimed that these numbers can change, if there is some major changes to the option chain, but right now these numbers are the way they are)

I asked him what specifically he looks at on the CL option chain. He told me it is the "volume, price change", however by looking at these data. how do you decide "settlement price end of day" or "possible price next week or even months into the future"? When I asked him these questions, he wouldn't tell me the specifics.

I found it fascinating that he said that option chain is where the market makers true intention lies, meaning whether the market makers want the price to go up or down, it tells you all in the option chain. If it is really what he claims, I wish to know exactly how to decode the option chain to find all these questions which can ultimately make my oil trades better.

I am a new oil trader myself and I would love to have any information that can improve my trading. Any help from experienced oil or futures/option traders would be greatly appreciated!
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Why not ask your friend if you could sit with him a few days.
 
by the way there has been alot of research done on options open interest and price influence.. you should look it up for yourself.. Dig your own holes if you think you have a lead.. you get better at digging.. Sometimes talking to other traders just gives me more insight into myself.. IE.. averaging into a trade, as an excuse to buy a loser etc.. Just because the guy trades with some options price transformation doesn't mean you would be able to trade his system even if you knew it.
 
Your friend's observations might be related to the "max pain" theory in options. I only have a cursory understanding, but basically price for the underlying tends to gravitate to the max pain price on expiration. There's tons of info on it on the interwebs.
I never really believed in it myself.
 
"5. Conclusion We have documented that there is a significant negative relationship between stock return volatility and the net gammas of the option positions of the option market participants likely to engage in delta hedging of their option positions. This relationship is consistent with both intuitive reasoning and theoretical models implying that rebalancing of option hedges should affect stock return volatility. In addition to being statistically significant, the relation is also economically significant. We estimate that on the order of 12 percent of the daily absolute return of optioned stocks can be accounted for by option market participants re-balancing the stock hedges of their option positions. Furthermore, the re-balancing is estimated to alter the probability of daily absolute stock returns greater than 300 (500) basis points by 11 (18) percent. The negative relationship is found in both large and small capitalization optioned stocks and is not restricted to the option expiration week."

http://finance.sauder.ubc.ca/conferences/summer2007/files/pearsonPoteshmanWhite23Feb07.pdf
 
cdcaveman said:
maybe some kind of gravitation towards open interest
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He told me that open interest isnt at all important as the actual volume being traded.

cdcaveman said:
by the way there has been alot of research done on options open interest and price influence.. you should look it up for yourself.. Dig your own holes if you think you have a lead.. you get better at digging.. Sometimes talking to other traders just gives me more insight into myself.. IE.. averaging into a trade, as an excuse to buy a loser etc.. Just because the guy trades with some options price transformation doesn't mean you would be able to trade his system even if you knew it.
More...

had looked into some open interest info. Found a video somewhere explaining the open interest to be the options of a particular instrument opened by market makers. but how does that translate into the key price levels. I assume my friend takes the heavily traded (higher volume) option at a particular strike price to be a target price?
 
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trexrade said:
I have a friend who trades CL oil really well. He told me that all he uses is Option chain, volume, price and momentum.

He has been trading oil for about 2 years now and averages about 30k per week. One of his best trade (best single day profit) was 133k which happened last Friday when he shorted oil CL. He told me specifically what settlement price it could be every single day which he said was according to option chain. As well he can kind of predict what price it can go to next week/or even month: (for example, last friday he said oil was gonna close around 46.8, and it did settled around there end of day; also he said oil can come down to 44.6 this week, which is about to happen because it touched around 45.1 today/monday; He even laid out what price oil could hit next year January, which he claimed to be around 30) ...........(PS: he also claimed that these numbers can change, if there is some major changes to the option chain, but right now these numbers are the way they are)

I asked him what specifically he looks at on the CL option chain. He told me it is the "volume, price change", however by looking at these data. how do you decide "settlement price end of day" or "possible price next week or even months into the future"? When I asked him these questions, he wouldn't tell me the specifics.

I found it fascinating that he said that option chain is where the market makers true intention lies, meaning whether the market makers want the price to go up or down, it tells you all in the option chain. If it is really what he claims, I wish to know exactly how to decode the option chain to find all these questions which can ultimately make my oil trades better.

I am a new oil trader myself and I would love to have any information that can improve my trading. Any help from experienced oil or futures/option traders would be greatly appreciated!
More...



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:)
 
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