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    Studying Open Interest For Stock Direction - OptionTiger

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    James Liu
    Studying Open Interest for Stock Direction - OptionTiger

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    Studying Open Interest For Stock Direction - OptionTiger

    Uploaded by

    James Liu
    320 views10 pages
    Studying Open Interest for Stock Direction - OptionTiger

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    Studying Open Interest for Stock Direction - OptionTiger

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    Studying Open Interest for Stock Direction - OptionTiger

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    320 views10 pages

    Studying Open Interest For Stock Direction - OptionTiger

    Uploaded by

    James Liu
    Studying Open Interest for Stock Direction - OptionTiger

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
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    The document discusses how open interest can be used as an indicator to determine market direction and provide high probability trading opportunities.

    Open interest can be monitored before market open and compared to stock movement in the first 30 minutes to identify bullish or bearish sentiment.

    The combinations are: 1) Stock up, call OI up (bullish). 2) Stock up, call OI down (reversal). 3) Stock down, put OI up (bearish). 4) Stock down, put OI down (reversal).

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    BLOG
    Open Interest
    RESOURCES # # and Market Direction

    E-Books
    Volume and Open Interest (OI) are widely used to assess the liquidity of an Option. High OI and / or
    Videos
    Volume in Options usually means good liquidity, and consequently, once can expect decent Bid-Ask
    spreads. But
    Pastvery few traders tend to use OI as a tool to determine market (stock) direction. There are
    Webinars
    good reasons for this – you have to track OI for all the stocks you follow, and then for specific options
    at specificTestimonials
    strike prices. Generally, this is not a practical approach.

    FAQs
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    But let’s
    FREEsayLIVE
    youWEBINARS
    were interested in a stock one particular morning. There’s pre-market chatter and you
    know that the stock is going to be hyper-active today. In this case, you’ve decided to focus your
    attention to this stock at least for the day. When a stock is in this state, it can give you multiple trading
    opportunities in one day itself – there’ll be an initial burst when the market opens, and then a cool-off
    period, and perhaps another big run or two late in the day. These moves can provide for an exciting
    day. So, how can you take advantage of this kind of a situation ?

    This is a cutting-edge method (if I may say so myself ) using Open Interest, that can provide you with
    high-probability entry or exit signals. Truth be told, I’ve not heard anyone else using this method as an
    indicator, so at this moment, I’m going to claim that this method is mine. And I’ve become more
    convinced over the years because it has worked quite well. What you’d want to do is note down the At-
    the-money Open Interest of the Calls and Puts before trading begins for 2 or 3 strikes. And then see
    what happens at 9:30 am ET.

    There are four different combinations possible (assuming flat or sideways action is not among them) –

    1) Stock is moving up, and Call Open Interest is increasing


    This is Bullish. The increase in Open Interest (Call buyers coming in) is being confirmed by the
    momentum and price move to the upside. You can be more confident about taking a bullish position at
    this time.

    2) Stock is moving up, but Call Open Interest is decreasing


    This tells you the bullish momentum is probably going to run out soon. This is a leading indicator of a
    potential reversal in the stock. People are closing out their open Call positions. If you opened a Long
    Call in the previous case, you should be scaling out.

    3) Stock is moving down, and Put Open Interest is increasing


    Strong bearish sentiment and increasing. Good time to buy Long Puts and ride the wave down.

    4) Stock is moving down but Put Open Interest is decreasing


    The bearish sentiment is probably going to run out soon. This is again a leading indicator signaling a
    potential reversal move to the upside.

    Whenever I’ve used Open Interest for determining market direction, it has resulted in a high-probability
    trade most of the time. So in my opinion, this definitely works. But the problem is it’s not practical to
    watch this for more than one stock at a time. So unless you’re focused on taking advantage of a big
    move in one stock for that day, this method is not scalable. The second problem is – it will only work on
    active stocks whose Options are also active. There are some stocks which will be very active in the
    stock market, but not quite so in the Options markets, even when there is fundamental news events
    around it. It won’t work there, because you need to be able to see some quick changes in numbers in
    the Open Interest column.

    But if your goal is to make a killing on a day-trade on one active stock, by all means, knock yourself
    out..Let me know if you liked this method..and if you try it, would love to hear your experience.

    Share this Article

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