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Minyan Mailbag - CBOE Open Interest Numbers

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Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

John,

I was looking at CBOE stats for SPX Thursday evening.

This is what I saw:

Huge volumes of both 1200 calls and puts were traded today. Volumes dwarfed all of the nearby OI (open interest) numbers too.

IMO it's no wonder 1200 held at the end of the day and no wonder that a ton of money was lost probably on both sides given the closing OI numbers and bets being made in both directions.

The thing about CBOE stats for those Minyans that might not know is that CBOE end of day OI numbers are inclusive of every exchange (in other words accurate), but their intra-day volumes reflect only CBOE exchange traded options. In other words the volume activities for Thursday might have even been higher than what is shown above. I have not looked for this before so I do not know if this is normal rolling of options or not, but it does not seem like it. Was today unusual or am I just noticing something for the first time?

The other thing I noticed and have been following (but not shown below) is the huge numbers of QQQQ puts sitting out there for March.

Month in month out there are enormous numbers of QQQQ puts out there. Sometimes I feel like this market just cannot possibly drop with all those puts, even if they are nothing more than hedges of some sort. Put writers have been making a fortune for years it seems. Of course if we ever blast through one of those strikes with force, delta hedging is going to crucify the market, at least temporarily. To what extent do you follow OI on the SPX and QQQQ and how relevant is it to any trades you might put on? Looking ahead to March, there are already over 233,000 strike 37 QQQQ puts and 278,000 strike 36 puts. It would seem to me that this puts in some semblance of a floor that someone just might want to defend. Then again, IF we break thru those levels with force, won't PUT writers be shorting like mad? Sure has not happened like that for quite some time it seems.

Your comments and thoughts on this would be appreciated.

Minyan Mike Shedlock

Mike,

The open interest numbers do not seem abnormally high to me; the volume numbers are somewhat high for non-quarterly expiration, but that could be just coincidence that a large part of the open interest was traded on one day. Most volume occurs within a few days of expiration.

I gave up a long time ago trying to predict where the market is going; I opted out for trading the rate at which it moves. Large open interest shows how much gamma (long and short) is out there. Hedgers are usually long puts, so market makers that are leveraged are normally short them. The opposite is true of calls. Because of put-call parity, open interest usually over time works out to be roughly equal. But as the market approaches a lower strike of high open interest, we on average see volatility pick up as traders dynamically hedge their exposure. What happens then is how the hedgers react: if they sit on their hands, the market stays volatile; if they take the hedge off, the market stabilizes.

Regards,
Prof. Succo

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