The money in the market we define it as the interest of the operators in a specific instrument at a given price, therefore certain volumes and certain Open Interest. But who are these operators?
VOLUMES
Quantity of contracts traded in an exchange session.
Information = at a given price level there was an interest between two opposite counterparts, but given the volumes we cannot understand who really remained on the market
OPEN INTEREST
They are positions that have actually remained in the market, they are the result of the money of an operator who has bought and another who has sold. They are the measure of the risk of the actors who move the market and therefore the money of the operators.
A Volume is finalized in open interest when the reference exchange closes and afterwards, when the exchange is closed, all the contracts are calculated.
Open interests are therefore calculated only when the stock exchange is closed as they are contracts that have remained in the market
OPERATORS
The operators are those who act on the market with short / medium and long term operations.
They are divided into:
INSTITUTIONAL OPERATORS (funds, asset management companies, banks, etc.) use derivatives essentially to hedge their position
Ex: If it is a solid and lasting trend, the rise is fueled by the construction of equity portfolios (A) by institutional investors, who mainly buy Put OTM (P) options to hedge:
PRIVATE TRADERS and HEDGE FOUNDS of various kinds, to follow trends and make money are options sellers
Ex: in an uptrend they will tend to follow the market by progressively selling puts to institutions to take advantage of the trend and try to speculate on option premiums:
Speculators also have their own hedging techniques. Specifically, they tend to hedge options sold that are becoming ITMs
The seller will be forced to use the future (delta hedging) and transforming a short put position into a bearish short call lateral. And depending on the amount of futures entered, correct the delta totally or partially:
HOW DO YOU READ THE MARKET?
- Static analysis of the Open Interest of the options
- Dynamic analysis of the variations in the Open Interest of the options
- Cumulative distribution of options open interests and analysis of distribution movements
- Volatility analysis
- STATIC ANALYSIS OF OPEN INTERESTS
It is a snapshot of the market situation on a given date.
Analysis of the major put / call positions in strikes:
Summation analysis of put and call:
Analysis of net positions only then subtract calls from puts and vice versa:
2. DYNAMIC ANALYSIS OF OPEN INTEREST CHANGES
It consists in studying the evolution of monetary placements day by day.
For each strike and for each type of call and put options, let’s make the Open Interest difference from the most recent Y day to the least recent X day.
Analysis of change of Open Interest:
3. CUMULATIVE DISTRIBUTION OF OPEN INTEREST
4. VOLATILITY
How to measure the volatility of an instrument? There are several ways:
Range = difference between the maximum and minimum value
Difference = difference of observations with respect to the mean
Variance = mean of squared offsets
Standard deviation = square root of variance
Volatility is therefore the standard deviation of a series of observations with respect to its mean, observations defined over a period of time. It is indicated by sigma.
Or:
Historical volatility = is a measure of the price hike of a financial asset over a fixed period of time.
Implied volatility = is an estimate of the future volatility of the underlying and is a measure of the operators’ expectations about the future variability of the instrument considered.
If we put in relation between the Open Interest of options and market futures, the volumes, the price of the underlying and the volatility we will obtain a system.
We will see this in the second part! To the next article