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umfan92

How Do You Use Options to Help Predict Price?

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I say "predict" for lack of a better word since I know it is impossible to predict price. But I've read some articles about this and I'm wondering if any of you look at options to help determine where price is going. What do you look at?

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Ive looked at put and call strikes noting which strikes have significant open interest. It would seem these strikes do seem to provide some sort of support/resistance until expiry, but to be truthful I havent followed for long enough to deduce any significant findings.

 

Having said that, the logic would seem to make sense.

 

Interesting subject....

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Ive looked at put and call strikes noting which strikes have significant open interest. It would seem these strikes do seem to provide some sort of support/resistance until expiry, but to be truthful I havent followed for long enough to deduce any significant findings.

 

Having said that, the logic would seem to make sense.

 

Interesting subject....

 

Yeah I read an article about it and it basically analyzed Friday's options to determine a hint of what to expect the following Monday, and I recently found another article that was more long term than just over the weekend. It sounds like it makes sense, but I was just wondering if anyone does this.

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an increase in an option strikes volume or large increase in overall in open positions may just imply there is increased interest in people protecting a position, or it may mean there is some sort of insider trading going on when it comes to stocks. Depends on how much you are into rumours, conspiracy theories and the like :)

More than anything I think it is a good alert for whats possibly going to be of interest to others - which is what you want. Ultimately you can not really tell if they are just hedging a position, rolling or instigating new positions, and weather or not its a hedge, a speculative position, or even a spread against something else without having a closer understanding of the history of that instrument ....but if there is interest there then it might show more opportunity is brewing. I mean the option instigators (newly opened positions might just have money to burn and no real idea - or they might be a news letter with a lot of subscribers telling them t get into a stock)

 

When it comes to support and resistance - again a lot depends on who holds the instrument and what they plan to do with it - are they hedging speculating, where have they previously hedged etc; I have seen massive open positions been blown through because everyone thought that it would provide support - well, when it did not it quickly became resistance. So you know what they say about assumptions.....

 

 

end line for me is they can be another tool for scanning and looking for opportunity in conjunction with other tools, but dont read too much into any one situation and understanding the history of the instrument can be pretty important in understanding a particular option trade. :2c:

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Thanks for the reply SIUYA. That really helped a lot. I guess it's just one more thing to add to the technical analysis and fundamentals. I'll probably glance at it when I'm making decisions but I won't give it too much importance.

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end line for me is they can be another tool for scanning and looking for opportunity in conjunction with other tools, but dont read too much into any one situation and understanding the history of the instrument can be pretty important in understanding a particular option trade. :2c:

 

In my view, "in conjuction with other tools" applies to all indicators. I have not seen an indicator that can be consistently used as a "stand alone".

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In my view, "in conjuction with other tools" applies to all indicators. I have not seen an indicator that can be consistently used as a "stand alone".

 

I agree with you, ole. It's an interesting topic, though. I think I might make a new thread about it. Some people are very successful using just price and volume alone. In my opinion, indicators are very useful. I'm still new at this so I can't say that I use indicators successfully but I would prefer using indicators instead of just price and volume. I'm curious as to what other people think about this.

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In my view, "in conjuction with other tools" applies to all indicators. I have not seen an indicator that can be consistently used as a "stand alone".

 

yes....often people think there is just a trigger point - if this does this then buy/sell.

 

They quickly forget the setups required for a successful trigger are either found in a confirmation of a number of factors - be they indicators or market context, trends, fundamental factors etc - what ever floats your boat....

point is that these all indicate something might be happening, some setup for a trade might be occurring - the trigger for taking a trade is often a completely different thing.

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Major hint: the put/call ratio...

 

More puts than calls: hedge funds are protecting long stock positions

 

More calls than puts: hedge funds are protecting short stock positions

 

That's all for now...

 

 

Luv,

Phantom

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Thank you, Phantom. I'm not exactly sure I'm understanding it properly though. I think I may be interpreting it incorrectly.

 

If there are more puts than calls, hedge funds are protecting long positions. So I guess that means that they are expecting prices to go up. Or does that mean they are worried prices will go down? So should I expect prices to go up or down?

 

And the opposite goes for the scenario that there are more calls than puts?

 

I know this is a stupid question but I just want to make sure that I understand properly.

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Major hint: the put/call ratio...

 

More puts than calls: hedge funds are protecting long stock positions

 

More calls than puts: hedge funds are protecting short stock positions

 

That's all for now...

 

 

Luv,

Phantom

 

That was the original reason for the research I mentioned earlier. I was looking at the put & call open interest at 3 ATM strikes for Bonds, EuroFX, S&P, Corn, Gold and Eurodollars.I also noted the strikes where OI was significant eg OI in the 10's of thousands where most strikes had OI of thousand or so.

 

If the ATM ratio was extreme, then often there would be a reversal, if there was a healthy bias to one side, then price tended to continue.

 

The general context has to be taken into account (no big surprise eh?). eg if Gold had 99% more ATM calls, it wouldnt reverse. Eurodollars were balanced at the time didn't seem to have any significant

behaviour.

 

In short, it would seem call/put ATM OI seems to give similar results to volume behaviour re extreme reading, and healthy growth.

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Thanks for the reply SIUYA. That really helped a lot. I guess it's just one more thing to add to the technical analysis and fundamentals. I'll probably glance at it when I'm making decisions but I won't give it too much importance.

 

Yeah! That's preferably right. Thanks for that.

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...I'm wondering if any of you look at options to help determine where price is going. What do you look at?

 

Could have a look at this:

 

Leavitt Brothers: Blog

 

 

There's a guy who publishes the situation and his calls on a regular basis (before expiry).

He also explains pretty much of his reasoning.

You can judge on your own how reliable it is.

 

(My impression: Not very reliable)

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op,

Have you heard the old expression “fool me once,… fool me twice,…” ?

Well, the option writer’s goal is to fool you twice.

After banging my head at this same idea (and also playing as a premium seller) many years ago, I would consider anything you find in distributions of premium OR greeks across the array of strikes to be happenstance at best… no reliable quality edge. jmho

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op,

Have you heard the old expression “fool me once,… fool me twice,…” ?

Well, the option writer’s goal is to fool you twice.

After banging my head at this same idea (and also playing as a premium seller) many years ago, I would consider anything you find in distributions of premium OR greeks across the array of strikes to be happenstance at best… no reliable quality edge. jmho

 

So you're saying there is no correlation between options, and future price? Thanks for the response! I just thought the idea was intriguing but I wasn't sure if it would work.

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So you're saying there is no correlation between options, and future price? Thanks for the response! I just thought the idea was intriguing but I wasn't sure if it would work.

 

In terms of ‘correlation’, I’m saying some corre but not high enough. Sometimes they can't, but most of the time 'they' can cloak / disguise ratios, etc.

I found some pretty good patterns but they would not play out as often as they did.

There are many other ‘predictive’ approaches requiring a whole lot less work / processing that can make that same claim.

More on trickery... with premium you never can know what you're buying... so you can never really get what you thought you were paying for.

... I too thought the idea was intriguing (still do ) but never got it up to the level of consistency I was after... moved on. Not saying you or someone else can’t… All the best

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Thank you, Phantom. I'm not exactly sure I'm understanding it properly though. I think I may be interpreting it incorrectly.

 

If there are more puts than calls, hedge funds are protecting long positions. So I guess that means that they are expecting prices to go up.

 

You are right. They have expectation of increasing prices and they are hedging their bets with puts.

 

Vice versa when the ratio is reversed.

 

 

Luv,

Phantom

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If there are more puts than calls, hedge funds are protecting long positions. So I guess that means that they are expecting prices to go up. Or does that mean they are worried prices will go down? So should I expect prices to go up or down?

 

You are right with being confused.

It is not straightforward.

 

Big funds will obviously not buy puts if they think price knows only up as direction.

They will buy puts if they feel some fear that prices might go down.

And if the prices for protection seem to be ok (look at the premiums in the moment).

And .....

 

Also consider that there are other ways of protecting for downside risk (like going short futures).

 

And then there all kinds of complex option strategies like calendars, straddle ...

 

It once agains sums up: put/call ratio is not really an easy to handle tool.

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Big funds will obviously not buy puts if they think price knows only up as direction.

.

 

I submit to you and others that there is very little that is "obvious" when it comes to trading the markets.

 

Be careful how you throw that word around in your comments.

 

 

Phantom

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I would like to thank all of you that replied to this thread. I really appreciate when people take the time to help a beginner like me. I will answer to your responses individually later in the next posts.

 

Thank you to everyone.

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I submit to you and others that there is very little that is "obvious" when it comes to trading the markets.

Be careful how you throw that word around in your comments.

 

Funny remark given that you are posting things like this:

 

[big funds...] They have expectation of increasing prices and they are hedging their bets with puts.

 

which doesn't seem very prudent to me.

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