A few years ago, the renowned trader and best-selling author, Guy Cohen, revealed to me a simple and cool “trick” for looking at a stock from another angle (other than chart analysis) to measure how investors are feeling about a stock (whether more “bullish” or “bearish”).
Below is a step-by-step and simple explanation of his method for reading sentiment.
Step 1:
Go to a website like Google Finance. Type the name of the stock into the quote box (see image below). In this example I am looking at the stock of Apple Inc. (AAPL). Then click the link on the left panel that reads “options chain”.
Step 2:
On the Options Chain page, click the link on the right of the page for “straddle view”. Then change the time expiration of the option to the NEXT month by using the drop-down menu in the middle of the page (see image below). In this example I am changing the time expiration to January 2012.
Step 3:
You will see that there are two main columns on this page. You have on the left all the “call” option listings and on the right the “put” option listings. Don’t worry, you don’t have to know anything about options to do this! Just note that in simple terms, you buy a “call” option to make money as stocks go up, and you buy a “put” option to make money as stocks go down. The important columns here are the open interest for the calls and puts, and the strike price column in the middle of the page (see below image).
Step 4:
Now we search for the “Strike Price” that is closest to the current market price of AAPL. Since the current price of Apple is $389.70, the closes strike price is $390 (see image below). Now we compare the “open interest” for the Calls and the “Puts” to see which one is higher. We can see that the “call” open interest wins this test: 25,552 call open interest compared to 9,254 put open interest. This puts the balance of sentiment in favour of the “bulls” for Apple, indicating that this stock has a slightly higher probability to go higher.
I like to use Guy’s method as an extra to my technical analysis and I think you’ll find it very helpful too. Try it on your own favourite stock and let me know what you think.
excellent tip Alessio, simple things are always the best!
do you know where I can find a similar information about call and put regarding currencies, index financial futures? Pls let me know, thnx in advance, regards Konrad
Nice, thanks for sharing
Awesome tip thanks
Is it possible to see this for the footsie? when I put it in there’s no option chain link
Thanks again
J
Hello
And don’t you, Alessio, think that such data should be rather interpreted in contrary to what they show at first glance?
If there are ony 9k of put options bought (in case of Apple) it may mean that there are not many investors willing to underwrite them (sell them) –> they see potential for price to go down and if they sell put option then they will lose money.
Same reason for many calls bought – many willing to sell them as they see room for lower prices and earning a premium.
As selling an option brings risk of unlimited loss, that is the way I would analyse such data. From website of Chicago Board of Option Exchange you can obtain data on call/put ratios and simply check what is the relationship between price and cell&put optinons bought.
Take care
Thanks Martin – that is good thinking and you’re right about sometimes it pays to be contrarian. What I would say is that this “open Interest” check I describe in this article should be used alongside your technicals (and fundamentals if you like) and not by itself. All the best.
Thanks Mike for your feedback on my blog post. I appreciate it.
Open interest doesn’t always mean “buy to open”. Some of those Apple call option positions could have been opened by investors selling a covered call, ie “sell to open” which would increase the open interest as well. On the other side, a market maker would buy the options, then hedge their exposure by shorting the stock in a specific ratio (“delta hedging”). It could be that people weren’t in fact outright bullish but were long the stock and wanted to collect some premium in case of a pullback or let their shares be called away.
You do realize that the open interest for those call options could have all been purely written right? Each time someone writes a call (they expect the price of the stock to decrease) open interest is still increased by 1. So you could have had 25,000 people writing calls and expecting the price to decrease. Open interest should not be used as a means to determine the direction of the underlying stock. It is purely used to determine how liquid that particular option is. Therefore this method should not be used at all, even along side your other analysis, as it provides no value to your findings.
Thanks for sharing this wonderful strategy.
Why are you changing the expiration date of the option to “next month” ? Is there a specific reason?
Why are you changing the expiration date of the option to “next month” ? Is there a specific reason?
Absolutely not.
I quote Brandon and Dan.
This is OPTIONS’ BASICS, go study!!
It is all totally wrong. In fact it is just the other way round. High CALL OI means a lot more call writers are out to make money they have sold the CALLs at high premium and they would push prices down to make money by buying back at lower prices or even eat up the whole premium. Check your facts mate….