Hello, Once in a while I will see a very high number of open interests, like this: 14 64 3240 134 4 In the above example, 3240 jumps out on a particular strike price/date that is way above the normal amount of open interests for that stock. This gets me to wondering if the smart money knows something. You can look over several weeks of closing dates and prices, and a particular date/strike price jumps out as way more than normal.
To simplify, for 1 contract opened, you have one opening buyer and one opening seller. One is thinking that the underlying will be up, and the other one is thinking that it will go down. One will make money, and one will loose. Only one is smart (or lucky!).
Your question is trivial. Of course, high open interests / volume mean insiders, hedge, smart money etc try to benefit before the herd. That was true 100 years ago, this is true, this will be true in the future. For example, in Europe, today Nexans (NEX FP) is doing nothing but with abnormal volumes. Probas are high for a big rebound or a plunge Monday or Tuesday. Just an example. CM
Near the money options tend to have higher open interest... well, at least until price moves ;->) The size of open interest doesn't tell you much. For example, suppose your 3240 OI is the ATM put. Was it a bearish buyer of the put or was it a bullish buyer of the underlying who is hedging with the put (trader or market maker)? Some say that increasing open interest means that new money is flowing in and the current trend will continue... and that declining open interest means that the market is liquidating and that the prevailing price trend is coming to an end. It sounds reasonable but I don't know how reliable that is. But props to anyone who can fine tune it that well and trade successfully with that info.
There's a couple reasons for this. The first one to look for is when they were issued. Frequently the .50s are released after the even dollars, and the 1.00s are released after the 2.50s and so on. That's the biggest one, particularly on monthlies and LEAPs. You can often find matching positions that are individual legs of spreads / straddles / strangles. When you've eliminated those two possibilities, look for whales speculating. You can often see these in the underlying volume (last Thursday there was a speculative long put position on SQ, and I believe in the ask...so long; conversely yesterday on NKE, there was a speculative short strangle on the Jan $70s). Once you've got all this figured out, you can make some inferences about the market. Specifically, in the SQ case above the position was immediately hedged 1-to-1, and the volume bar is obvious. I didn't catch any volume on the NKE hedge, so my read on this is someone with a lot of money believes that NKE will cross $70 before 1/19/18. The value in figuring all this out is finding where speculative longs are on stocks. That means market makers are short--and thus will be delta hedging. And you chose a great day to ask this because the monthly expiry dates show this most strongly! With this information, you can infer sometimes how nearly 4-5% of average daily volume will change hands based on the price. And, I know there's a bunch of naysayers who are going to say nay. So, I'll end this with two points. One, I said infer, not know. Two, I made this post on 10/26 when SQ was trading at $34, and had never traded above $35. It's gone within .23 of $50 during after hours at its peak: How well you think I've done on that stock? (also, those predictions are stale at this point--so, don't read too much into the January predictions)
I was thinking the following: if you had an idea to buy an option, and you see a *lot* of people taking an open interest on that exact same date/price, then maybe the smart people are thinking what you are thinking, but they have even better info and skill. So you kind of copy the good ideas of the smart people.
You can definitely play these types of moves, but that's not the right way to do it. Very often the price will settle very close to very unbalanced options. So, chasing the big money is ironically a good way to lose yours. It's one piece of information to fill in a little more color in the big picture. When the chart agrees with the fundamentals agrees with the chains, that's where the opportunities exist. Or, perhaps where they don't agree. The delta hedge moves are very predictable, and if there's an imbalance between the puts / calls, you can figure out the net delta. If you're looking at whole number percentages of daily average volume when you have a traverse of the strike (for example, if we know that as price goes from 36.82 - 37.18 that 2% of daily volume must be hedged), that's a HUGE advantage in the market. Practically, this means you trade other strikes (or even the outright), with a solid understanding of likely price movement.