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Old 11-03-2009, 04:32 PM
alex alex is offline
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orange Tracking Smart Money with Options

This is my attempt to track traces of smart money with the help of option market.Most members mentioned the intention of learning this option market not for option trading but to track what smart money is doing.
Option market is under developed in India, when i say that it means common public ( crowd ) dont use it to their advantage but for their disadvantage.
FIIs,banks,HNIs,hedge funds, in short big money ( for lack of terms we say 'SMARTMONEY' ) trade in those markets and take full advantage of it.

Will start from basic things, why option market ?
answer- because information revealed through option is not very clear cut, viz. if nifty rose by 100 points and close at top with highest volume, indicates strength, 2500 put fall by 7 % with high open interest, what it reveals ? the message is hidden.
For every option buyer there is one option seller.
Then how to judge strength looking at open interest? well..there is simple logic, to buy ( underlying )2500 nifty put of 50 rs u need to shell out 2500 rs. and to short ( option word - write ) 2500 nifty put u need to shell out REGULAR NIFTY MARGIN ( worse, some brokers even dont allow it to retail public )
Now one hidden information been revealed, now its easy stuff, big money is more smarter than small money ( exception to rules always exist ) and when 2500 put open interest rising means smart money writing 2500 options with additional confidence.
why 2500 nifty put, why not 2600 or 2700 nifty put ? for that we need to cover another basic the mother logic of option writers, will cover in separate post here
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Old 11-03-2009, 04:42 PM
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hehe.. as usual... path to haven:nod:
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Old 11-03-2009, 05:54 PM
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Mother logic of option writers
Time frame - Most important factor in option writing is time factor, its illogical to write option for one or two days, most option writers choose option writing over nifty because to earn time premium, so option writers are MOSTLY intend to hold position for one complete month.
When nifty 2500 pe. been written at 150 rs at start of new derivative series, and as month develops and if open interest increases that means option writers coming on conclusion that 2500 nifty level is good support FOR THIS MONTH.
At the end of month when derivative series expires and say nifty closes above 2500 then nifty 2500 put close worthless ( closing price would be zero ) and option writer earns 150rs profit/ lot.
Now easy part over, complication starts here .. market doesnt behave like a good child and it takes hail out of every trader to earn money, when option writer write 2500 pe market always doesnt rise, market may fall further.. if market falling further when puts been written, those option traders dont close their position in loss, instead they start writing calls ( logic of writing calls is same as of pe ), then as series develops you get all bunch of open interest of put and call
shown in figure ( marked with red line )



This way smart money creates the noise, above chart is recent one, you can see that huge build up on 2500 put but observe closely how smart money writing calls as well, distributing open interest on 2600 & 2700 call.
increase in put open interest is bullish
increase in call open interest is bearish
so when we divide oi of pe to oi of ce u get resultant figure which tells directional bias of smart money.
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Old 11-03-2009, 06:34 PM
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Originally Posted by alex View Post
This way smart money creates the noise, above chart is recent one, you can see that huge build up on 2500 put but observe closely how smart money writing calls as well, distributing open interest on 2600 & 2700 call.
increase in put open interest is bullish
increase in call open interest is bearish
so when we divide oi of pe to oi of ce u get resultant figure which tells directional bias of smart money.

So this is the thing called PCR=Put:Call ratio!!!
Do we divide all the oi of PE by CE or only a particualr strike price.

Thanks for starting this thread.
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Old 11-03-2009, 07:05 PM
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Originally Posted by rkkarnani View Post
So this is the thing called PCR=Put:Call ratio!!!
Do we divide all the oi of PE by CE or only a particualr strike price.

Thanks for starting this thread.

Mostly( like one hears on cnbc) all o.i...i divide 10 most active put by call
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Old 12-03-2009, 05:52 AM
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Thanks Alex for starting this thread. Looking forward for some classy stuff from a smart money tracker like you.

Just to add 2 cents from my side.. (these are my views and experience)

1) Calls are written at Resistence level.. (with the reasoning that resistence will hold, the price will stay below this level and finally the option will expire worthless).
If nothing then atleast mkt will loose 1 or 2 days while attempting to break a resistence level.
More calls written at a level, indicates stronger resistence level as percieved by mkt players.
2) Same logic applies to puts and support level.
3) If we extend above 2 points in terms of PCR, then if PCR > 1 at a particular strike, means more puts written then calls, i.e. a support level for mkt. Bigger the PCR number, stronger the support.
If PCR < 1 for a strike = Resistence level for the mkt.
4) As mkt approches the particular price level and sentiments indicate that the level might be broken, then PCR starts shifting to next level.
5) Some people try to calculate PCR for a strike price by taking near and far month contracts for same strike and adding the numbers. The strategy like Calender spread (selling front month option and buying far month option of same strike) will give wrong impression if you look at only near month. But if u take 2 months view, the PCR will be more balanced. This approach also gives smooth rollover of PCR which is affected due to of option expiry.

Happy Trading
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Old 12-03-2009, 08:14 PM
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Originally Posted by AW10 View Post
Thanks Alex for starting this thread. Looking forward for some classy stuff from a smart money tracker like you.

Just to add 2 cents from my side.. (these are my views and experience)

1) Calls are written at Resistence level.. (with the reasoning that resistence will hold, the price will stay below this level and finally the option will expire worthless).
If nothing then atleast mkt will loose 1 or 2 days while attempting to break a resistence level.
More calls written at a level, indicates stronger resistence level as percieved by mkt players.
2) Same logic applies to puts and support level.
3) If we extend above 2 points in terms of PCR, then if PCR > 1 at a particular strike, means more puts written then calls, i.e. a support level for mkt. Bigger the PCR number, stronger the support.
If PCR < 1 for a strike = Resistence level for the mkt.
4) As mkt approches the particular price level and sentiments indicate that the level might be broken, then PCR starts shifting to next level.
5) Some people try to calculate PCR for a strike price by taking near and far month contracts for same strike and adding the numbers. The strategy like Calender spread (selling front month option and buying far month option of same strike) will give wrong impression if you look at only near month. But if u take 2 months view, the PCR will be more balanced. This approach also gives smooth rollover of PCR which is affected due to of option expiry.

Happy Trading

thanks for inputs, glad that i started the thread, hoping more good ideas like above
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Old 13-03-2009, 11:41 PM
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PCR ratio is of 2 types- (1) OI based (2) traded vol based
Interpretation of both type is different.

OI based PCR tells where new money has flown while traded vol based PCR maps the overall sentiment which is called the herd mentality in the trading parlance.

Unlike in US, where options trading has more Turnover than Futures; in India, reverce is true.
Hence,options are mainlyl used as a hedging tool by big players.

During Jan 08 fall, PCR(vol) had fallen from 1.5 to .7 and which was followed by a big 21 Jan fall.
Morale of the story is,PCR should not be the only criterion for the decision making.
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Old 14-03-2009, 01:20 AM
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increase in put open interest is bullish
increase in call open interest is bearish

INCREASE IN PUT OPEN INT. DOES NOT MEAN BEARISH AS MORE PEOPLE R BUYING PUT
INCREASE IN CALL OPEN INT. DOES NOT MEAN BULLISH???
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Old 14-03-2009, 12:06 PM
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If some one not familiar with market profile ( chart in black background ) then please ignore it, will try to make sense in context with open interest put call ratio and vix.
When we speak about smart money, tracking of it my way was to track o.i. pcr, when one dig further, u realize there is a correlation between volatility index ( vix ) and oi pcr.
My friend well said above, oi pcr must observe with other indicators, methods.Basically oi pcr is not an indicator, anyhow it may seems like an indicator, ( like an oscillator swings between high and low ) but its not true, in oscillator there r precalculated overbrought and oversold zone, like rsi 80-20( more precise 100-0).
OI PCR swings as per open interest of put in relvance with call, 2 years back before MAY fall i hv seen oi pcr gone as high as 2.50, now after jan fall oi pcr hasnt sustained above 1.85.
One way to look at it is reading oi pcr as market generated information and so track the smart money.
relation of vix with oi pcr -
volatility index is called as fear index, it signifies the fear factor in market participants.If market is trading on some level and there is fear that those levels r not sustainable ( mostly when market is on interm swing high ) volatility index try to jump and when there is fear increased then put writers become cautious and so oi pcr tend to go down.If vix increased and oi pcr didnt go down that means smart money somehow confident that this increased fear factor will subside and nothing to worry about.
There r other factors attached with vix and oi pcr, increased vix means increased option premium, though for put writers its enticing to write options with higher premium, risk is also involved with it, and if they r willing to take that risk and willing to write puts on increased vix then short term dimensions r changing for sure... its very long subject, tried my best to inform as much as i could..
Trying to make sense of above chart
Vix falling and there is support which is indicated by red line, interesting to see if vix goes down beyond this support line ( change in market cycle if it does )
same time look at the oi pcr resistance indicated by red line, interesting to see if vix goes beyond resistance and stay there, again change in market cycle if it does.
Look at the price chart ( in black background ) top red line indicates resistance/prev swing high if market try to go above that resistance then change in cycle ( market cycle i am talking about at least of aprx. 2 months)
when all three coincide together beautifully then probability of this to happen is very high.If price manage to go in that zone ( area between 2 red lines ) will not surprise to see increase in call writing .
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