"Options market pricing in a X% move on the stock"

[arturo3]

Quote from itmediaco:

In that case, is it effective to compare open interest (buys) vs volume-open interest (sells), instead of the P-C ratio?

I am not sure I inderstand your question. The Put-Call ratio on a given underlying corresponds exactly to the ratio between the volume of short and long positions.
However, you can get a more precise information on that underlying by looking at the open interest at a specific strike price.

 

[Prevail]

an increase open interest for calls could be initiated by buyers or sellers.

Quote from arturo3:

Correct. But the open interest tells you the amount of new positions being opened on that option, i.e., an increase of the open interest on a call tells you that there is an increase of long positions on that derivative and viceversa.

 

[thegazelle]

Take this hypothetical example

Say that a stock is at $21.25. A hedge fund has some inside info, that a bad announcment is coming out that the public does not know, and the stock is expected to drop a $1.25 to $20.00

Say the $20.00 call is trading at $1.75 and
Say the $22.50 put is also trading at $1.75

Both strikes are equidistant from the current stock price.

If you bought the $22.50 put, and the stock is at $20.00 at expiration, you make $.75

If you sold the $20 call and the stock was at $20.00 at expiration, you'd make $1.75

The difference between the two is that you SOLD time value, instead of buying it.

So we already know the fund is bearish, and they KNOW the stock will go to $20. It is in their best interest to sell the $20 call, which makes the open interest on the $20 increase.

Because the open interest of the $20 calls increases, it does not mean that the person buying/selling is bullish.

Let me know if what I am saying isn't clear.

 

[MTE]

Quote from arturo3:

...i.e., an increase of the open interest on a call tells you that there is an increase of long positions on that derivative and viceversa.

Not true, a contract has a buyer and a seller, so an increase in open interest in calls doesn't mean an increase in long positions. It just means new positions were open. The "initiator" could had been buying or selling.

 

[thegazelle]

http://www.cboe.com/tradtool/webcast.aspx

Today's unusual option activity. Mar 60 TXU calls. Trading at 2.15 at the close. Going to open at 10 on Monday. 500% return in a weekend isn't too shabby.