{quote} 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...
IB does not charge for live CME price feed as long as any one of the two accounts is being used. Live trading or Paper Trading. I can give access to one of my trading accounts paper account, which I don't use so often so that you can have an access to the live price data feed and API use for analysis purpose only.
Open Interest of Futures is equally important.
The key to options trading is to acquire an understanding of not only the volume but also the Open Interest. It does not indicate who is a buyer or seller.
To make life easier, I assume unless there is no seller there can't be a buyer. So I focus only on what sellers of options are doing.
Are they entering the market? Which strike price levels? and why?
Are they quitting the market? which strike price level? and why?
Basically, I treat the Call Strike levels where Open Interest contracts are parked as resistance levels since the sellers think the market WILL NOT cross their chosen levels.
We can devise four resistance levels based on the concentration of CALL Open Interest at each strike price.
Similarly, we can build four levels of support taking Put Open Interest numbers in account where the sellers think the Price will not drop.
Finally, there will be a zone of support and resistance hugging the ATM line.
These Resistance (call) and Support (put) levels keep changing dynamically as the price moves up and down.
COT data is of no help in trading of short-dated options like Weeklies. It is only the Open Interest that helps determine the trend of the market.
A graph like below will be very helpful. Brokers use payoff diagrams (technical stuff) and a retail trader can't make much use of them.
Four Strike Prices drawn on both sides of ATM is good enough to get a bird's eye view of the trend.
Reference material:
I am quoting a few excerpts from a classical book "VOLUME AND OPEN INTEREST Classic Trading Strategies for 24-hour Markets" by KENNETH H. SHALEEN
SIGNIFICANCE OF VOLUME
Volume is a measure of urgency. It is the result of the need for traders and investors to "do something," and nothing creates more urgency in a market than a losing position. Since any useful chart analysis determines what the losers are
doing, the technician will want to monitor this sense of urgency (i.e. , volume), thereby assessing the health and strength of the prevailing price trend (up, down, or sideways).
SIGNIFICANCE OF OPEN INTEREST
For every profit dollar in futures trading there must be a loss dollar. Open interest
is a reflection of this very important concept. If a futures trader makes a correct
market judgment, where do the funds come from to pay off his or her winning position?
The funds come from the loser. This may sound harsh, but it is a fact of
life in every futures market. A technician should be very interested in what the
losers are doing. The change in open interest is the key to this puzzle.
The analysis of open interest changes is important for at least three reasons:
Open Interest Provides FueI to Sustain a Price Move
The analogy of fuel to the market is like that of fuel to a fire. If the fuels removed
from a fire, the fire will go out. If fuel is removed from a price trend, the trend will
change. Fuel in a futures market is provided by the losing positions. When open
interest declines, fuel is being removed and the prevailing price trend is running
on borrowed time. For a healthy, strong price trend (either up or down) to continue, open interest ideally should increase, or at least not decline. This is so important a concept that remembering the word fuel as a surrogate for open interest will place a trader ahead of 80 percent of all futures traders worldwide!
Open Interest Indicates the Existence of a Difference of Opinion
There is nothing that creates a market more than a difference of opinion. This is
reflected in a willingness to take an open position and hence an increase in open
interest.
Economists state that any marketplace searches for an equilibrium price
the intersection of the supply and demand curve at a price that clears the market.
What if a futures market was at the theoretical equilibrium and the entire dealing
world knew it? What would be the level of open interest? Zero. There would be
no need for hedgers to shift risk or speculators to put their hard-earned money on
the line to outguess the market direction. But no one knows where equilibrium is;
it is always shifting. Open interest measures the difference of opinion and, more
importantly, how it is changing.
For instance, a borrower of funds tied to a floating interest rate (potential
short hedger) knows that if rates rise, financial difficulty awaits in the form of
higher costs. The borrower does not know which way rates are going, but wants
to shift the risk of increasing rates. A speculator may think the market can be out
smarted and decides rates are going down. Both the borrower and speculator have
a willingness to put on an open position.
Increasing open interest is the signal that profits will be available (from the
loser) as fundamental supply-and-demand factors move interest rates toward a
new equilibrium. What is important to understand is that the difference of opinion creates a market that can sustain a significant price move.
Open Interest Determines If the Losers are Being RepIaced
Technicians do not care if a losing position is being financed by meeting margin
calls and throwing more money at the market, or if a loser steps aside and new
blood comes in to take the loser's place. What matters is that the funds are being
posted at the clearinghouse. The losers are necessary to pay off the traders with
the correct market judgment. When the losers decide that they " do n' t want to play
the game "anymore" and leave the market, open interest will decline. Obviously the losers pay the price for their misjudgment, but what is of importance to the technician is that declining open interest means the prevailing price trend has become very unhealthy.
Practice makes a person perfect
