Oh guru's, Help a newb out, please. Could someone explain to me what I can divine from OI? I can understand when a huge number of puts or calls are gathered around a certain strike, that a large sentiment may have developed for that price. Is it possible to tell what strategy is most likely being used, such as a directional play, credit spread or fly? A poster on another thread called "my options play" posted this in response to AAPL going down last week... -------------------------------------------------------------------------------- Quote from Rob on Business: How did you figure AAPL was going down this week? It looks so steady. Was the analyst downgrade today expected or not figured at all? -------------------------------------------------------------------------------- just a hunch based upon the open interest near the 70 strike and all the front month 75 calls - with a paucity of puts. also -- over the years -- expiration week (particularly triple witch) has been a very good time for this kind of counter-trend 'surprise ' move - and a surprise downgrade. Of course I don't want to say that there is manipulation of stocks and that the timing of the downgrades right before triple witch was staged--- but it is a rather interesting coincidence that they couldn't wait until Monday to downgrade. Now why would that be? AAPL is going much lower in January - watch and see-- the Q isn't whether it goes lower-- but rather-- "from what level" it starts it's decline- current levels or higher like say- $80+. Today they catch another analyst call with MS setting 90 as the "target" - sounds like they want to distribute their stock to suckers late to the party. ----------------------------------------------------------------------------------- Thanks in advance.
Can you expand on that? Are you saying that there is no additional information that I can use to help me with my trading when looking at OI? As I said, I'm a newb, so I'm not familiar with what you refer to as a "max pain" strategy. Could you please explain the type of strategy you are referencing?
There is a theory that the stock will always gravitate towards the strike with the highest Open Interest at expiry, so that as many options expire worthless as possible and thus causing pain. This theory is called "Max Pain" Theory. You can google it, there's plenty of info on it. Personally, I agree with riskarb, OI provides no useful info whatsoever. Each contract has a buyer and a seller so OI doesn't mean anything. I have noticed that some of the stocks that I trade sometimes tend to expire close to a strike price, but it's not always the strike with the highest OI. In other words, I wouldn't just trade based on that.
I'm a newb too, but I've always considered OI as a measure of liquidity in the option, and that's about it. I could be wrong in this, however.... - The New Guy
Yep, Riskarb & MTE have it right. More discussion here; http://www.elitetrader.com/vb/showthread.php?s=&threadid=56688 Be careful you don't fall asleep ! Personally, I prefer to read tea leaves.
how about trading Max Pain on the "after fact" bases ? Like buying a put/shorting[call/long] at Friday before close (or Monday) on stock that DID moved to Max Pain strike , betting on price unsustainability/reversal