How to Trade High Volume Call Options for Profit

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It is safe to say that most novice traders in the world are not trading options properly. If we high volume options trades this, then all we have to high volume options trades is find the area where most traders are making mistakes and then take the opposite position.

We will then have a high probability for success in our trades. Open interest is a statistic unique to options and futures trading. Open interest is the total number of contracts that are currently in existence and have not been offset by closing trades. This is different than volume which is the number of contracts traded for the day. If you were to buy an option to open a position and the person who sold you the option is also opening a new position, volume would increase by one and open interest would increase by one.

If high volume options trades then sold your option to someone else who did not have a position, then volume would increase but the open interest would not change as you transferred your interest to someone else. Open interest would have decreased if you had sold your option to someone who had already sold an option and was buying to close their position.

Since both of you are closing positions, the option contract is not needed anymore and open interest goes down even though the transaction increases the volume reported. Understanding open interest can seem confusing at first, but our instructors at Online Trading Academy do an incredible job at making difficult concepts easy to understand in the classroom.

Open interest is important to stock traders and investors as well as option traders. Open interest shows us where traders are putting their money. Remember that the novice traders are the ones who usually buy options. We can use the knowledge that high volume options trades tend to make money to predict potential price movement for stocks just before the expiration of the stock options.

There is a concept in the markets called option pain. When a seller of an option sees the price of the stock move to where they would lose money, they are feeling pain. By looking at where the open interest of a stock or ETF is, we high volume options trades make assumptions on the price levels where there would be a lot of pain. High volume options trades there is a high volume options trades amount of open interest, there is also a large probability that the price will not close there by expiration.

This is because if it does, then the sellers of those options would stand to lose a lot of money. In an effort to profit from large option or futures positions, institutional traders will often buy or sell the underlying stock in an effort to push prices to a point where the close will benefit them. This means that the price will often close on options expiration day just above or below the price where the greatest open interest lies and the least amount of pain would be felt.

There is a term for this action, pinning. These traders attempt to pin the price of the stock or ETF to profit from a derivative position. Pinning is illegal in most exchanges in the world and traders who participate in this high volume trading in an effort to manipulate prices could face penalties.

The problem is in catching the culprit and the SEC punishing them. But does it really work? That is where the largest open interest happened high volume options trades be. Since prices opened above this range in the morning, traders should have been looking for opportunities to short the ETF until it settled into the range suggested by the open interest.

So, what can a retail trader do about this pinning? Recognize that it does happen and either stay high volume options trades of the market or trade the momentum. Trading high volume options trades can be very risky as you need to be quick in your decision to enter and exit when the momentum is slowing, not reversing. It is not for everyone, but if you are prepared you may be able to profit from this pinning that occurs in the markets every expiration day.

Watching the potential pinning activity in the week before option expiration and also the open interest on the weekly options can also assist those traders looking to make profits on short-term swing trades as well. Trades should only be entered based on supply and demand zones.

The open interest information provided here is only a decision support tool. To learn how to identify the zones accurately and efficiently, visit your local Online Trading Academy office today. Disclaimer This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk.

The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed high volume options trades this newsletter.

Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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There will simply be as many option contracts as trader demand dictates. Someone needs to look at the big picture and keep track of the overall number of outstanding option contracts in the marketplace. Simply put, open interest is the number of option contracts that exist for a particular stock. They can be tallied on as large a scale as all open contracts on a stock, or can be measured more specifically as option type call or put at a specific strike price with a specific expiration.

Keep in mind that each option contract normally represents shares of the stock. This brings up a point worth noting: Instead, it is officially posted by The OCC the morning after any given trading session, once the figures have been calculated.

For the rest of the trading day the figure remains static. As you can see from figure 1, open interest can vary from the call side to the put side, and from strike price to strike price. High open interest for a given option contract means a lot of people are interested in that option. The main benefit of trading options with high open interest is that it tends to reflect greater liquidity for that contract.

So there will be less of a price discrepancy between what someone wants to pay for an option and how much someone wants to sell it for. Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options.

Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risks , and may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point.

The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct.

Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. System response and access times may vary due to market conditions, system performance, and other factors.

Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results.

All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between.

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