The expectation is that option sellers will have a better grasp of the anticipated movement of the underlying stock or index since they are taking on an infinite (better put unknown) risk in exchange for a tiny premium.
For the last two quarters, at the very least, the market has been in a relatively stagnant state in terms of actual return. We traders are under pressure to profit from our deals because of this. Although positional trades may not perform well when there is little volatility, we do have intraday possibilities in bumpy range-bound markets.
It is more appropriate for a market with significant mood fluctuations, but the rewards are less and the transactions more frequent. There must be a method to this madness, as they say. Let us use Open Interest (OI), a crucial options data, to outline the approach.
OI: What is it?
OI is the quantity of open contracts. Options contracts do not need any tangible reference, unlike shares, where the entire number of shares is known. To put it simply, an OI of 1 contract is created whenever a new buyer and seller collaborate to form a deal.
What role does Options (Sellers) OI play?
Both the buyer and the seller contribute to the creation of options OI. But as everyone knows, options are similar to insurance plans. A buyer will also pay more in this case if an event occurs (the call buyer will prefer the occurrence of a huge bullish surge). Should that not occur, the premium will become zero.
To elaborate, insurance firms are necessary for the existence of an insurance policy. In this way, Option Sellers are a more significant opponent to Buyers in Options OI. Option sellers should have a superior grasp of the anticipated movement of the underlying stock or index since they are taking on an infinite amount of risk (better put, unknown) in exchange for a little premium.
We may conclude that there are many option sellers in the Strike with Maximum OI. Stronger players have more confidence in their trades when there are more sellers.
How is the Highest OI Strike Trade followed?
Option to Call In contrast to the buyer’s perspective, the seller’s stance is that the stock or index should not rise over the strike price.
Put the option According to the seller, the stock or index shall not fall below the strike price.
Nevertheless, because the majority of option sellers believe that the highest OI call strike indicates strong resistance, we can also state that this strike is often higher than the current market price. In a similar vein, the highest put OI may indicate robust support.
This is a useful input for our positional trading strategy.
How can I utilize it to trade intraday?
Similar to other forms of resistance and support. There is evidence to show that momentum occurs if the highest Call OI (above the current price) or the highest Put OI (below the current price) is reached. This is because the market has shown many powerful people to be mistaken. Turmoil will result from this, and momentum will follow turmoil.
How Can I Trade?
Purchase that call with a stop loss a few points below the strike price as soon as the highest Call OI strike is crossed. Likewise, the Put with a stop loss a few points above the Strike Price crosses the greatest Put OI strike. Most of these transactions, in my experience, turn a profit because of the momentum behind them.