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Exclusive Market Analysis, Alerts and Commentary from the DaytradeTeam trading staff
Tuesday, August 15, 2006
The Role of Open Interest and Volume in Options
Open interest plays an important role in options trading. Each day, open interest figures are published for put and call options on futures markets, stock averages, industry indexes, and individual stocks. In options, open interest is not interpreted as it is for futures, but it does tell us the same thing - where the interest is and the liquidity. Option traders may compare call open interest (bulls) to put open interest (bears) in order to measure market sentiment, while other use option volume.
Volume's use in options is the same as in stocks trading and futures. Volume gives our Option trader the degree of buying and selling pressure in the market. Like open interest, volume is broken down into call (bullish) volume and put (bearish) volume. Monitoring and comparing the call against the put volume, our trader can determine the degree of bearishness or bullishness in the market. Also in options, volume is used to construct put/call volume ratio. What this means is when option traders are bullish, call volume exceeds put volume and the put/call ratio falls. When there's a bearish attitude, there is heavier put volume and a higher put/call ratio. The put/call ratio is seen as a contrary indicator. A very high put/call ratio signals an oversold market, and a very low ratio negatively warns of an overbought market.
Option traders us open interest and volume put/call figures to determine if the market's sentiment is bullish or bearish. These sentiment readings work best when combined with the technical measuring tools used by swing traders, support and resistance levels and the trend of the underlying market. Since timing is so crucial in option trading, most option traders use technical analysis.
Join us today for the excitement of Live Day Trading in our Live Trading Room. Let our experts help you boost your portfolio.
Happy Trading,
Andy Swan
Co-Founder, DaytradeTeam
p.s. Don't forget to sign up for the FREE Buzzzzzzz Daily Newsletter to get all of these articles DELIVERED to your email daily!
Volume's use in options is the same as in stocks trading and futures. Volume gives our Option trader the degree of buying and selling pressure in the market. Like open interest, volume is broken down into call (bullish) volume and put (bearish) volume. Monitoring and comparing the call against the put volume, our trader can determine the degree of bearishness or bullishness in the market. Also in options, volume is used to construct put/call volume ratio. What this means is when option traders are bullish, call volume exceeds put volume and the put/call ratio falls. When there's a bearish attitude, there is heavier put volume and a higher put/call ratio. The put/call ratio is seen as a contrary indicator. A very high put/call ratio signals an oversold market, and a very low ratio negatively warns of an overbought market.
Option traders us open interest and volume put/call figures to determine if the market's sentiment is bullish or bearish. These sentiment readings work best when combined with the technical measuring tools used by swing traders, support and resistance levels and the trend of the underlying market. Since timing is so crucial in option trading, most option traders use technical analysis.
Join us today for the excitement of Live Day Trading in our Live Trading Room. Let our experts help you boost your portfolio.
Happy Trading,
Andy Swan
Co-Founder, DaytradeTeam
p.s. Don't forget to sign up for the FREE Buzzzzzzz Daily Newsletter to get all of these articles DELIVERED to your email daily!
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