How to understand the
a. “Expected” Sentiment*
b. “Expected” Price Action*
on respective strike prices based on Volume and Open Interest on both Calls and Puts.
Example:
TSLA current price: $239
How to understand if the market expects TSLA to move in the direction of $240 based on Calls and Puts at $240
Or
How to understand if the market expects TSLA to move in the direction of $237 based on Calls and Puts at $238
*: “Expected” because no one can tell which direction the market will move but trying to learn how to at least tell which direction the market is “expecting/hoping” to move.
Thanks!
Understanding the dynamics of Volume & Open Interest
byu/bhaavesh inoptions
Posted by bhaavesh
1 Comment
“Understand” might be a bit ambitious. Volume and OI are weakly predictive, at best. Arguably they are anti-predictive, since they are more likely to lead you to an incorrect prediction than a correct prediction.
In other words, take anyone’s claims about “expected sentiment” and “expected price action” based on volume and OI with a very large grain of salt. I would not make trade decisions based on those wild-ass guesses.
> How to understand if the market expects TSLA to move in the direction of $240 based on Calls and Puts at $240
There’s nothing to understand because there is no connection between volume/OI and the direction price will take in the future.
You *could* use a 240 straddle to calculate the volatility that the options market is pricing in, aka as the expected move, but that has nothing to do with volume or OI.
I’m wondering if you saw the abbreviation “vol” in association with a discussion of how a straddle’s price is an estimate of the expected move and mistook “vol” to mean volume instead of volatility?
Here’s an explainer on how to use the 85% rule for straddles to calculate expected move:
https://optionshawk.com/calculating-expected-moves-using-options/