Who is the primary driver of option trades?

Open Interest is known to be the best tool for analysing option activity.
Does it reflect what option traders are doing on a given day?
Can we construe large volume as an indicator of day-trading activity?
How do we use Volume or Open Interest to identify whether the market is turning bearish or bullish?
Who actually is the primary driver of option trades? Is it the seller or the buyer?

I am looking for answers to these questions because short-dated options like weeklies and b-weeklies facilitate day-trading of options .
Options encompasses the whole world of derivatives and gives a skillful day trader to a chance to make money from a small account.
Buying is simple and I prefer to stick to it.

It is like sports betting.

I bet on Bulls or Bears. My wins (80%) should nett me 2,000 per cent gains in a year and losses (20%) should not take away from me more than 1,000% leaving with me a profit of 1000%.

Can Open Interest help me in achieving it?

I hope experienced trades can share their views on the effectiveness of Open Interest and provide sources for tools.

I've never found a way to use Open Interest as a tool for trading. As you might guess, Open Interest is pretty much always highest for front month at the money options.

Some traders look at unusual option volume to put on trades. Traders will view the unusual volume as knowledge of insider info and try to copy the trade... That's too risky of strategy for me though so it's not something I'd try.

Most options pros sell rather than buy options and typically do well (for awhile) since their probability of winning is inherently higher in selling options. Trading options is a whole other world really, a lot of dedicated options traders don't care too much about what the underlying asset does and are solely focused on their Greek exposures. I don't know if there's really a long-term edge that way, but I'm sure plenty of people would say there is. For me, I just use options as a tool to support my trading because I believe you still need to know something (ie price prediction, volatility prediction, etc) to be successful.

Glad I found someone interested in exploring the use of Open Interest.
I am trading options since 35 years and not a technology savvy guy. Can't handle even Excel.

I consider financial trading world as an Ocean and I believe there is no secret way as such to fish there.

In fact, I would love to transfer my experience of 35 years experience to anyone free of cost but there are no takers on most of the forums.
They would rather pay $$$$$ for course or mentoring fees in order to get "efforless success". Trainers exploit this weakness to sell their services. Brokers provide free paper trading platforms or colorful video games to lure them knowing well 99.99% will lose. Programmers who as well believe in "effortless success" turn signal provider or EA makers to cover their losses from trading adventures.

Options trading trainers don't know how to tame the Theta (time-decay) Beast which needs a few years of regular practice turn to teach selling. Advisors are sourcing deep pocket clients and promote selling a quick income channel. Brokers are happy trainers are promoting trading of multi-leg options.

For me Buying is the key to the riches.

This is my Quick Lesson for option learners. Just focus on buying options for at least 5 years.

Option Buying is as simple as sports betting. If you understand this simple logic in a couple of minutes, you are in business.
Winners: You bet on Bulls which means you think the market is going to go up. You just buy a call option and pay a fixed price. No matter how deep the market dips, you owe nothing to anyone except what is already paid for the purchase of the call option. Theoretically, you can make unlimited gains if the market goes up. In reality, you have to be content with realistic profits.
Loosers: Your bet on Bears thinking the market is going to go down. You just buy put option and pay a fixed price and no matter how up the market goes, you owe nothing to anyone except what is already paid for the purchase of the call option. Again, theoretically, you can make unlimited gains if the market goes down. But in reality, you have to be satisfied with realistic profits.

So far so good. Now you will ask me two simple questions:

1. How do I know when will the market go up or down ?
2. How can I measure what is supposed to be realistic profits?

In order to get answers to these simple questions, you have to spend anywhere from 2 years to 10 years practising trading of options in order to acquire essential skills mostly related to understanding the influence of psychology on the behaviour of investors (handling hope, greed and fear) playing the probability game (it is a skill) , managing risks (another skill) and money (capital) , studying the methods to measure the entry and exit points (another skill) and get in or get out in a realistic way (putting Hope in place).

This knowledge comes from practice of simulated and live trading. Just like any profession you need certain skills and need to gain experience. Options trading is no different from it.

I am basically a currency futures options trader but the futures options market just covers a fragment of the total currency options market. OTC options data is not accessible to a retail trader and so I use Spot FX trading tactucs ti trade CME fx futures options using Interactive Brokers platform.

As against this, the Index futures options market provides a levelling field. Most of the data is known publicly. I am now trying to find out about the data for major 12 markets .

Newly opened market is India (march 2019) which now surpasses the volume of USA stock indexes.

Since I have access to live Open Interest and volume data and charts, I enjoy trading is India market.

Buying Index options to my mind, provides a chance to grow small accounts in big levels in 2 years. 2000% proift from 80% of wins and 1000% deficit from 20% of losses is good enough to make 1000% profit in a year.

I will make a watchlist of 12 instruments and trade on 4 of them at any time. A combination of setups will be: Breakout, range-trading, support and resistance lines, and Bands (Bollinger, Keltner, Moving Averages envelopes ). I think Murrey Math Lines will work very well on the index CFD charts to help trade future options.

Volatility should be around 15%. Tighter spreads and higher liquidity is needed.

All of them will be offering weekly or bi-weekly options. I will be trading the short-dates ones because the investment will be small, Time-decay can be managed, and metrics can figured out ultimately after a few months of trading.

I have made up to 80% in a matter of a day trading Nifty 50 and 120% on HK market (which is illiquid - started in September 2019)

Fortunately, CFD providers are into Index trading in a big way. So MT4 statistical indicators can be used to predict the direction of Options.

I can't site before the computer for more than 5 minutes because of my back problem, and I use voice to type text. I haven't yet found a good multi-tasking smartphone so that I can source and compile data.

Basically, you need graphs of Open interest and volume like this to help take trading decisions.
Treat the strike price attracting the largest volume of Call options as Resistance Line and the Put with the largest volume of Put Options as Support Lines.
And then see the tug-of-war between the sellers trying to save their skins.

Options buying is simple but needs discipline and use of skills rather than hopes. It is a boon to retail investors as long as they stick to trading of one leg only. Buy call or Buy put. Full stop.

Finally, Interactive Brokers has realised that retailers are not buying options and the market makers have to cover the sellers.
They have just launched a new app. IBKR sports . It is for sports betting but an excellent tool to learn about buying of options.

Another quick lesson on why buy options?

Pros

Huge Leverage extended by the exchange (not by the broker) - Picture attached.
So No borrowing costs
No margin call
Unlimited stoploss chances

Don't need deep pockets - Picture attached of Call selling.

Cons

Taming Theta (time decay) Tiger is really really Tough

In my experience, options add another level of complexity to trades. Timing gets very very important since you're constantly combating time decay. Normally, if I'm bullish on say Gold I can just buy GC futures and if nothing happens for a month it's not a big deal. However, if you buy GC calls and nothing happens you lose... There have been a number of times I've been correct about movement on an underlying asset and still lost on the option due to time decay. I like options, but its a difficult game to play so I only use them under certain circumstances.

For what it's worth, options trading offers a few tools that are useful for analyzing the underlying asset. Implied volatility, for example, can be very interesting to study and it can give you a sense of how fearful (or fearless) traders are.

Another metric that's been a popular subject of discussion lately has been gamma positioning. Apparently traders will hedge their gamma exposure and cause movements in the underlying asset. Zerohedge has written extensively about gamma over the past year or so and I've found it very fascinating. Unfortuantely, I'm not clear at all on how to actually calculate gamma neutral and failed when I attempted it a few months ago.

Options is a boon for small investors. Only those who are not looking for "effortless success" will make it. Have to invest from 2 years to 5 years in acquiring skills .

1. Futures position trading will suit someone who is sufficiently capitalised and is willing to accept psychological pain, and has following skills:

(a) spotting an instrument which is very liquid, is not so volatile and has strong mean-reversion tendency by looking back at history and trading patterns
(b) managing positions by averaging or varying lots

Forecasting is really not required. Take the case of an instrument like EURUSD. Just buy or sell if the price goes up/down by 200 points and you will get around 5 chances in a year to make at least 1000 pips.

2. If you treat options as providing two streams of trading, then you can be clear as to what you want to trade.

If I buy an OTM option with 10% delta and aiming to sell it at 50% delta and before, then I am trading for a limited purpose. I will do it. Because the investment is quite small.

For this kind of trading I am not looking at the underlying price increase/decrease because it needs more than 50% of delta to consider it.

If I am looking to trade just for an increase or decrease in the price of the underlying, I have a few choices:

Position trading: Buy deep in the money options with 85%+ which has negligible component of Theta (time-decay). Expiry of 40 days and more.

Day-trading: Go for short-dated weekly or bi-weekly expiries, Theta will not be a significant factor . In fact , ideal for day-trading as against spot futures trading because you don't have to worry about stop loss.

3. If I have thin pockets, what choices do I have except to work on my prediction skills, if I really want to make an income from options trading. By focussing on buying options for short-term trading, you enter the market ONLY WHEN YOU HAVE A FIRM DIRECTIONAL BIAS. Instead of putting up a margin with a broker and paying borrowing fees, why not use the leverage provided by the exchange free of borrowing cost.

If you buy short-dated OTM options, the leverage can be anywhere from 500% to 2000%. Buying ITM will also give you good leverage and the ability to be right in spite of getting a few times wrong without losing money in one shot like a stop loss.

4. The whole purpose of trading for a small guy is to be right in direction since he/she lack deep pockets.

5. The whole objective of trading short-dated options is to get high leverage and only those who have skill of spotting quick directional momentum should go for it.

6. Any small guy attempting to enter big and uncertain world of financial trading has to practise playing the probability game in real environment and it may take a few years to attain proficiency in required skills.

I have devoted 10 years just on practising and acquiring this skill which comes from real trading. Can you become a pilot, driver or sports person just by reading books?

Where do you get open interest and volume graphs. I mean what platform you use. Regards

Does not in call options a rate has to be given to which the price is expected to rise.

Any furtures broker supplies live volume and Open Interest.
CME charges money for data feed. But brokers collect a small subscription fee from customers.
Without opening an account with any broker, you can't get cheap access to CME data feed.

You make some good points, but I've never really traded like a small investor so it's unfamiliar territory to be honest. If you're not overly concerned about Risk of Ruin then it does open you to a wider range of possible trading strategies.

Thinkorswim is a great platform for options if you're interested in giving it a try.
I think you're referring to the strike price?

Open Interest: It's no Secret

Open interest is a concept all option traders need to understand. Although it is always one of the data fields on most option quote displays (also called Option Chain) - along with bid price, ask price, volume and implied volatility - many traders ignore open interest. It is as important as knowing the option's price or current volume.
Unlike spot market trading, in which there is a fixed number of units are to be traded, option trading involves the creation of a new option contract when a trade is placed. Open interest indicates the total number of option contracts that are currently open - in other words, contracts that have been traded but not yet liquidated by either an offsetting trade or an exercise on maturity (call buyers have the right to buy) or assignment (put buyers have the right to sell).
Why is it necessary to understand Open Interest?
Open Interest is a helpful tool in analyzing the strength of a price move. There are four main interpretations of Open Interest

1. If price increases and open interest increases, then there is strength behind the price move higher.
2. If price decreases and open interest increases, then there is strength behind the price move lower.
3. If price increases and open interest decreases, then there is weakness behind the price move higher.
4. If price decreases and open interest decreases, then there is weakness behind the price move lower.
5. In other words, Open Interests allows us to quickly gauge where the money is flowing.

How does Volume helps track the market?
Volume helps measure how much activity is occurring on a day (intraday). Unlike spot markets, one cannot fully gauge the demand/supply using volumes. If the volume increases it does not necessarily mean that the open interest has increased too.
Open Interest indicates the open positions in the underlying scrip/contract. Open positions reveal what the traders expectation of the future is.
Open Interest quickly tells us where the money is going. If the number rises, that means new (fresh) contracts are being made. In other words, Open Interests allows us to quickly gauge where the money is flowing.
Why knowing the trading volume of the underlying futures is important?
Trading volume gives an important insight into the strength of the current market direction for the option underlying futures asset,
Trading volume is relative and needs to be compared to the average daily volume of the underlying assets or futures. A large percentage change in price accompanied by larger than normal volume is a solid indication of market strength in the direction of the change. But large percentage increases in price accompanied by small trading volumes are less likely to indicate a market direction. In fact, they may indicate that a reversal is likely in the near term.
While simultaneous increasing of open interest and volume, direction of the trend price movements is likely to remain unchanged.However, the decline in volume and open interest is a signal of the end of the current trend.

Options trading is a zero-sum process. What this essentially means is that in order for some traders to make money out of options trading, there must also be traders losing money.

The price of an underlying security will move to a point by expiration that will result in the maximum possible loss for holders of options. For this assumption to be valid, the majority of securities that options can be based on must always move towards a price that means most options contracts expire worthless. A large percentage of contracts do indeed expire worthless.

We have no idea who is in the driving seat? Who actually is the primary driver of option trades? Is it the seller or the buyer? A lot of options contracts are bought as part of creating an options spread, perhaps to limit the risk of taking another position, where the expected likelihood is that they will expire worthless. Open Interest is pretty much always highest at these levels. You can treat Highest Open Interest of Calls as Resistance Line and that of Puts as Support Line. And then watch the tug-of-war that happens when stakes are quite high.

It is assumed selling of calls and options is done by big institutions and they take steps to protect their interest. In reality, it seems so happening.
There is a theory built around the terim Pin Risk that refers to a threat that an option held by the seller will expire at-the-money or near-the-money.

If you want to trade like more than a small investor, I suggest you produce a few future options analytical tools pulling live data from IB. I can mentor you without taking any money from you on how to make minimum 200 pc from Eur Usd stress free a year. U invest in ur I B account $25, 000 . In return for my mentoring time you pay back by producing for pubilc use a few Options analyticals tools. Not any trading tools or any botd not just for me but for all FF members.

Option traders sell OTM options feeling safe. You may produce a simple indicator which sums up the total of OTM call as well as put options OI to provide a visual representation. It will help us in finding the trend of the market and stop hunting moves for spot fx market. The interface should be generic which means I should be able to input any option chain symbols of any instrument and get a visual bar graphs for analysis.

With your pytheon and R skills which you have demonstrated here makes me believe you will do a fast and competent job. Your profile shows you are an Interactive Broker customer. IB supplies customers free live CME price feeds.

Another tool I would suggest is how to draw support and resistance lines for currency trading again using OI data from IB API. It will come later if you show genuine interest.

Thanks for the offer simnz, that's very generous of you. I'm pretty well set as-is, but I'd be happy to do a little coding to help other traders out.

The tool you proposed sounds interesting, but how would it work? Which OTM options would you look at? All of them or just ones that are say, >1 standard deviation from the current price?

Unfortunately I'm no longer an IB client. I had to move everything out from IB back in October due to a compliance issue with my wife's work. Along the same lines, my trading is monitored now and I have some restrictions like a minimum holding period. It's pretty disappointing, but there's no getting around it so I just have to adapt.

In any event, it looks like I can import options chains into R from Yahoo so I should be able to make some tools.

Good job