Option volumes as screening for insider knowledge

Z

zupdawg

I'm testing the idea of using option trading data to screen for insider knowledge being implemented.

I don't trade options myself so there are some things that are unclear. Would appreciate some help if someone knows, or if someone know if there is a million people already looking at this :)


"Open interest" is supposed to show the number of outstanding contracts:

- Can a data provider really provide a full overview of this (legislation?) or is it just a subset of all contracts out there?
- Does it make sense to assume that when a contract is opened, that is being done through a trader (who wants to implement an idea) buys the contract from a market maker? So +1 open call contract implies a positive interest?

I have also tested some things based on the actual trading volume ...

- How much of the trading volume would be traded against a market maker (which would then add/subtract to the number of open contracts by the end of the day), vs just being traded between two traders (which would keep the number of open contracts constant)?


So far I have a screening that looks for sudden extreme spikes in the # open calls, where there are no similar spikes in the # of open puts (or vice versa). Then filtering away some noise.

This will not be a quant trade strategy, just a qualitative screening
 
I rely on established astrology techniques to predict what insiders are up to. Jupiter and Pluto movements are of utmost importance here. So a bi-weekly planets positions screening is nesessary. And I never trade on Haloween. That is my edge.
ps Last couple of months I even started to incorporate tenets of Cyclic Conformal Cosmology into my market models. When I'm done - my edge will transform into Conformal Edge and I will accumulate all financial resources on the Planet Earth.
 
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zupdawg said:
I'm testing the idea of using option trading data to screen for insider knowledge being implemented.

I don't trade options myself so there are some things that are unclear. Would appreciate some help if someone knows, or if someone know if there is a million people already looking at this :)


"Open interest" is supposed to show the number of outstanding contracts:

- Can a data provider really provide a full overview of this (legislation?) or is it just a subset of all contracts out there?
- Does it make sense to assume that when a contract is opened, that is being done through a trader (who wants to implement an idea) buys the contract from a market maker? So +1 open call contract implies a positive interest?

I have also tested some things based on the actual trading volume ...

- How much of the trading volume would be traded against a market maker (which would then add/subtract to the number of open contracts by the end of the day), vs just being traded between two traders (which would keep the number of open contracts constant)?

So far I have a screening that looks for sudden extreme spikes in the # open calls, where there are no similar spikes in the # of open puts (or vice versa). Then filtering away some noise.

This will not be a quant trade strategy, just a qualitative screening
More...
Is the open interest there because an insider was buying or was it the insider selling. Or was the insider simply hedging on a large stock grant they recently received and think the stock is fairly valued. Or is that put actually part of a multi-security bullish position and you can't tell because you have no idea what the other legs are? I could go on and on, but hopefully you get the idea that it's hard to impossible to derive insider sentiment from option volume.
Note that you can get legal insider position for free from the SEC, they have to file all their changes in positions, including options
 
Like @Sig says... there's no way of telling who the initiator of the trade is, what he did (buy or sell) or why he did it.

Can be stand-alone, spread, rollover, cross exchange spread, hedge for stock position...

The only time traded volume in an options series is interesting, when there's hardly any volume on a day to day basis... and then still, can be anything.

I've got the same issue with put/call ratios... they don't mean anything really.
 
Sig said:
Is the open interest there because an insider was buying or was it the insider selling. Or was the insider simply hedging on a large stock grant they recently received and think the stock is fairly valued. Or is that put actually part of a multi-security bullish position and you can't tell because you have no idea what the other legs are? I could go on and on, but hopefully you get the idea that it's hard to impossible to derive insider sentiment from option volume.
Note that you can get legal insider position for free from the SEC, they have to file all their changes in positions, including options
More...

Makes sense. Large stock grants and activity in other maturity dates & strike prices is something I've tried to check for. But I see I'm not covering all the moving parts.

When I mentioned insiders I did not really mean insiders in that legal sense, but rather activists that spread rumours about M&A activity or start a smear campaign
 
Large open interest and volume can tell where you might want to look. After that you have to do your own digging. I've found that by studying the options taq data you can often figure out what is probably happening. However it's time consuming and may be fruitless. I would say it's one tool in a vol traders toolbox of finding mispricings.
 
Telepuzik said:
Cyclic Conformal Cosmology
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I tend to also prefer Conformal Cyclic Cosmology but only when the Fermi Paradox is used. That's a more novel perspective which could, in principle, be encoded in the cosmic microwave background. I have found however that the application of the Fermi Paradox does cause aberrations when applying Fibonacci sequences to my charts. In reality however I have found that applying Occam's razor works best. I.e. use as few assumptions as possible. That the simplest explanation is probably the best explanation. That the simpler model is probably the better model. The more assumptions and intricacies you add, the more likely your explanations are inaccurate. Go ahead, put bollinger bands, rsi, moving averages, channels, hanging chads and swinging pitchforks on your chart and see where it gets you. >.-)

P.s. I did try using Gann levels and a Sentiment Zone Oscillator once but found that whenever the Earth and the Moon came into alignment it threw everything off. I am doing well this month but I believe that it's because the New Moon is in Libra and the Sun has moved 30 degrees, Mercury moved from Virgo to Scorpio, Venus moved from Scorpio, where it is bad, or weak, to Sagittarius, where it is neutral, and by the next weeks Weekly /ES expiration date Mars will still be in Capricorn and out of Bound, where it is exalted, extremely strong, and the rest don't move much. Uranus and Neptune will still be retrograde, it is enough to absorb Pluto's Direct motion. And cause all my OTM credit spreads to expire OTM. Awesome...
 
The disorder is characterized by a sudden onset of psychotic symptoms, which may include delusions, hallucinations, disorganized speech or behavior, or catatonic behavior. The symptoms must not be caused by schizophrenia, schizoaffective disorder, delusional disorder or mania in bipolar disorder. They must also not be caused by a drug (such as amphetamines) or medical condition (such as a brain tumor). The term bouffée délirante describes an acute nonaffective and nonschizophrenic psychotic disorder, which is largely similar to DSM-III-R and DSM-IV brief psychotic and schizophreniform disorders.[1]
 
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