Open interest options is a complex and very important topic when it comes to trading options. Options traders should pay close attention to the open interest in a particular asset in order to get a better understanding of what is going on between the buyers and sellers of an options contract. Another important indicator to use in options is volume.

Using both of these helps traders feel what the market sentiment is going to be like for the day. This way, an option trader has a better idea of what kind of investment decisions to make next.

What Does Open Interest Mean In Options?

Lets first define what open interest means in options. Open interest is the total amount of unclosed options contracts that hasn’t been settled (closed) for an asset. If an options contract exists then there is a buyer and a seller. This contract is equal to 100 shares of the asset and it is open until a counterparty closes it.

An open contract has both a buyer and a seller to its name. If both the buyer and seller close their position then the open interest decreases by the number of contracts they entered into in the first place. If a buyer or seller decide to pass their position to another person, the open interest does not change. Open interest is the total number of contracts bought or sold, but not both. New contracts are created when a new buyer or seller enters the market. Open interest changes daily and is usually associated with the options and futures markets.

Open interest reflects investor interest but it doesn’t mean their views are correct or profitable. Traders and investors can look at the open interest to get a sense of investor sentiment, and also see where the action is being looked at. If there is a lot of open interest, then this means that the market trend is gaining momentum or will continue, and vice versa.

Open Interest Versus Volume

Volume and open interest are two key indicators that options and futures traders can use to gauge the activity of contracts in their respective markets. A change in open interest and volume is an important activity that is looked at closely by traders but there is a difference between the open interest and volume. Let’s first define the two to get an idea of how they can be used in options trading.

Volume is the number of contracts traded in a period of time while open interest is the number of active contracts. Traders can use a sort of volume open interest indicator to trade. Volume measures the exchange of contracts between buyers and sellers for a particular contract.

If a buyer buys 10 option contracts for ABC at a strike price of $100 and a seller sells 10 options contracts, the trading volume has increased by 10. Traders and investors see high volume as a good indicator that there will be a greater interest for that specific security. Higher volume also means a trader can get in and out of a position quickly.

Open interest measures the number of contracts that are active positions, which means they haven’t been closed, expired, or exercised. Open interest decreases when holders or writers close out their positions and increases when traders buy long or write short positions, as well as when new contracts are created. The difference between open interest and volume is that volume can only increase while open interest can either increase or decrease. Volume measures the contracts that were bought or sold while open interest is the number of contracts currently held.

Change in Open Interest and Volume

A change in open interest and volume indicates different markets in a given time. As a trader, make sure to look at the following open interest and volume correlations to get a better understanding of what is going on in the market.

  • Rising prices in an uptrend while open interest is decreasing indicates short sellers are covering their positions. Money is leaving the market which is considered bearish.
  • Falling prices in a downtrend while open interest increases indicates that new money is coming into the market on the short side which is considered a downtrend continuation and bearish.
  • Open interest numbers flatten following a rise in both price and open interest—this might be a sign of a top in the market.
  • An abnormal number of open interest in a bull market is a dangerous sign. When this rising trend reverses, expect a bear trend to follow.
  • A breakout from a trading area is stronger if open interest rises during consolidation. Many traders will be caught on the wrong side of the trade when the breakout happens. Price moves out of the trading range and traders are forced to leave their positions. The greater the rise in open interest during a consolidation period, the greater the possibility of a potential move to happen next in the market.
  • Rising prices in an uptrend while open interest increases indicates that new money is coming into the market which is considered bullish.
  • Falling prices in a downtrend while open interest decreases indicates holders letting go of their losing positions and is bearish. It can also mean the selling climax is near.
  • When there is high open interest and the price drops suddenly at a possible market top, then this is bearish since holders who bought near the top are losing money and could panic sell.

Why Do Open Interest and Volume Matter?

Options traders not only have to keep an eye out for the change in price of a particular asset, they also have to look out for the daily volume and open interest in the options market. By understanding all these factors, a trader and investor can make better-informed decisions.

A trader can use daily trading volume to look at the strength of the price movement in the option’s stock. But, this trading volume has to be compared to the average daily volume of a given stock. When there is a significant change in price followed by higher than normal volume, then this indicates a change in sentiment in the market. But, if this increase in price with low volume indicates that there is not much strength in the move. It could even indicate that a price reversal is coming soon.

Options traders should not ignore the open interest number that is given along with bid price, ask price, implied volatility, and volume. Open interest indicates the number of contracts that are currently existing and held. Open interest is not updated during the trading day, unlike volume. There is no way of telling whether the open interest of the options was bought or sold.

Using Open Interest and Volume to Trade

Traders should use open interest with volume to gain some valuable information about what is going on with the contracts. When the volume is higher than the open interest on a trading day, it indicates that trading that option had a high interest that day. Open interest also helps traders understand if there is liquidity for it. When there is a large open interest, there are many buyers and sellers which helps to get orders filled easily. The bid and the ask will also have a reasonable spread in prices.

An example of this is if there is a lot of high open interest for a particular ABC company of around 10,000 then there are a lot of investors looking to trade this market. The bid price of the option is $1.20 and the ask price is $1.25 so it is likely that a trader can buy an option at a mid price between the two. Traders specifically look for contracts that have a tight bid and ask price, as well as high liquidity to get in and out of positions quickly. For investors who want to hold longer, high volume and open interest is also a good indicator for their investment decisions.

When traders use open interest and volume to guide their investment choices, they can understand what other traders are doing during the trading day. These indicators can be used to identify opportunities that would be overlooked if volume and open interest were not being used. Open interest and volume are also important to inform of the liquidity so that a trader can enter and exit a trade at the best price. Traders have to use indicators to have a better understanding of what other traders are doing and feeling on the market.

If you are looking to join a group of like-minded traders interested in options, join the RagingBull webinar to go over what there is to know about options.

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

I’m going to make a bold call – the market tops out here in the next two weeks.

Early this week, I started seeing internal market indicators flashing warning signs. Even though the indexes kept closing higher—there were some key laggards.

I told my Total Alpha Members that it was time to put my money where my mouth is.

That’s why I began selling deep-in-the-money call spreads in some overextended names.

Currently, I’m sitting on 50 spreads— betting against TSLA.

If I’m right, I make $14,500. If I’m wrong, I lose $10,500.

By the way…I have 6 trades on 6 different stocks just like this in my
Total Alpha Portfolio.

So why am I such a bear all of a sudden when I just pulled down a massive $42,455 Win on AMZN being a bull?

 

What would make me give up on trades like these?

Because that’s what my analysis tells me.

Let me walk you through my thought process, and see if you agree.


Leaders Rolling Over

I first spotted the leaders slowing down. We’re talking Apple, Amazon, Tesla…all the heavy hitters didn’t continue to make new highs.

Here’s what I’m talking about. Let’s look at the hourly chart of AAPL.

 

AAPL Hourly Chart


There’s two critical pieces of information here. First, I want you to see that the 13-period moving average is getting closer and closer to crossing over the 30-period moving average. That’s what I call my ‘money pattern.’ This pattern isn’t just for trade setups. It highlights potential trend changes in a stock.

Second, look at the two arrows. The left arrow points to the last consolidation area. The bottom of this consolidation is support. Now, the second arrow points to the candle that closes below that level. That is a telling break of the hourly support.

At first, you’re like ‘Who cares…one stock means nothing.’ That’s true. Now, I want to draw your attention to the same phenomenon on several other leaders.

Amazon looks significantly worse. Take a look at its hourly chart.

 

AMZN Hourly Chart


You can see how Amazon already had the crossover occur. It went back to test the underside of the 30-period moving average before heading lower.

This stock looks much weaker and likely headed for the gravitational line.

Do yourself a favor, take a look around and see if you can spot some of these. They’re most prominent in the tech sector at the moment.

 

VIX Holding Its Ground

Under normal circumstances, the VIX and markets have an inverse relationship. This means that as the VIX climbs, stocks fall. When stocks rally, the VIX falls.

Right now, that’s not the case. We’re seeing the same markets up 10-20 points every day on the S&P 500. But the VIX isn’t playing ball. While it hasn’t rallied hard, it’s not dropping either.

 

VIX Hourly Chart


I know that the VIX can fall lower than $12. Heck, it spent most of 2017 below $11. But when I see stocks rallying every day, and the VIX not rolling over, it makes me wonder.

Not to be left behind, the VVIX – which measures option demand on the VIX – is also rising.

 

VVIX Hourly Chart

This is my favorite leading indicator for the markets. You can see how the VVIX already jumped and is about ready to create a money pattern crossover to the upside. That signals more demand for VIX options (normally calls), which should indicate traders buying protection against a downturn.

 

Safety Rally

Let me take it a step further and discuss the gold trade. Gold continues to be on an absolute tear. You often see traders stash money here when the market goes down as a ‘safety trade.’

Right now, we’re seeing a lot of buying in gold.

 

GLD Hourly Chart


Initially, it looked like gold might roll over…and it still might. But it’s rallying while the rest of the market is as well. If it gets any more steam, we’ll see a bullish money pattern crossover here as well.

Let me give you one last piece of evidence to support my thesis. Bonds tend to trade inverse the stock market. While this isn’t always true – and certainly hasn’t been the last few years because of the Fed – short-term, you will see money hide there.

Right now, bonds look really bullish.

 

TLT Hourly Chart

 

My Conclusion – Hide The Kids

With so many stocks overbought, and a run that’s virtually gone on for 90 days straight, we’re due for a correction. 2018 ripped higher in January only to get throttled in February. That’s precisely what I see happening here.

I’m working with my Total Alpha Traders to get a portfolio that profits from the next move. You can join us before the big money is made.

Join me for my upcoming options masterclass. You get a full week of live education hosted by me.

Click here to learn more.

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

They say it’s not what you know but who you know.

And they’re right!

It wasn’t that long ago that I was sitting on the couch in my dad’s living room, watching Shark Tank and thinking, “Someday, I’m gonna pitch my company to Mark Cuban.”

(Also thinking—shit man, I need to get my own place, badly.)

Now, I’m writing this email from my own couch and brand-new home.

My network has made me a millionaire.

Now, in the world of angel investing, networking startups have literally minted billionaires.

In fact, when most people think of a successful startup, they’re thinking of companies like Facebook. Or Twitter. Or Snapchat, or Instagram, or LinkedIn.

In other words, they’re thinking of social networking unicorns.

Some people say there will never be another Facebook, and they’re probably right.

But, in a world that is more connected than ever before, we are growing less connected with every click.

The rise of the massive social media platforms we know today – Instagram, Snapchat, and Twitter – intertwine us with billions of people every second.

Yet, these platforms leave us missing out on opportunities to truly be part of a community.

The applications that allow us to communicate with ease are the very applications severing the interpersonal ties that bind us together.

To fill this rapidly widening gap, a new industry is rising up that we have dubbed “Niche Networking”.

Here at The Boardroom, we’ve been keeping an eye on this market. And we’re convinced it’s only going to keep growing.

We’re seeing brand new apps specifically curated for untapped markets, software that will continue to improve the way we connect with employees and customers, and revolutionary ways to expand your network and capitalize on opportunities.

Now, I know that networking as a whole is a major concept and discovering emerging industries to invest in can be an overwhelming feat to take on by yourself.

But that changes now.

A new generation of startups is working in concert with industry’s networking giants to improve networking and change the way we grow our communities.

This brand new industry was built by startups and is loaded with investment potential.

And we think it’s about to dominate in 2020.

 

6 Startup Sectors that Will Dominate 2020

 

#5 – Niche Networking

 

Personal Networking

First up, we’ve got networking platforms created for building your community. This sub-sector of Niche Marketing is geared towards building your interpersonal network. More than connecting through a few surface-level emails, startups in this sector are creating apps that promote genuinehuman-to-human interactions.

These innovative new startups recognize the demand for networking tools that extend beyond a few simple parameters. They don’t want you to just “date around” in your network – they want you to find the perfect match. To do this, they’re creating new technologies that make meeting like-minded people easier than ever.

Grow your personal network with these new applications that can do everything from recommending meeting points that fit your personality and meeting style to introducing you to people in your area who have complementary skill sets and experiences.

Wanting to meet someone from an entirely different lifestyle than yours? You can do that too. Multiple startups in this sector are introducing new networking platforms specifically curated for meeting and learning about people who are the polar opposite of you.

My favorite part about this sub-sector? There’s major money to be made here.

Before going forward, we need to look back at a company that changed the game.

I’m talking about companies like Tinder and Meetup, which changed what was once a taboo concept – meeting strangers online – into a billion dollar industry seemingly overnight. Far from monopolizing the space, these pioneers spawned a myriad of copycats who focused on the niches they might have overlooked.

One company that is taking this emerging sector by storm is Nextdoor. The entrepreneurs behind Nextdoor created the platform for people to build relationships with the people in their communities and stay up-to-date with local happenings. With that in mind, their platform allows users to share local events, plan activities, and communicate through neighborhood dashboards and private messaging. Explore your city, build your career, or try something new with the people from your community.

This San Francisco-based company has raised over $455 million in funding and their estimated yearly revenue is $62 million. Every month, over 78 million people visit the Nextdoor site. As of 2017, Nextdoor had a $1.5B valuation.

As an angel, those numbers make me want to drop everything right this second and find a way to get involved as an investor!

Growing my network while doing the things I actually enjoy doing? That sounds like something I can get behind.

I see major potential in this subsector of Niche Networking because it is helping us replace one of the things we are most lacking in the digital age: community.

Professional Networking

This next Niche Networking subsector is my favorite.

I don’t know about you, but the thought of securing the perfect connection that will introduce you to your next professional opportunity can be daunting. Yes, we have Linkedin. But how do you know who to connect with and how do you turn that connection into a new job or business partner?

Thankfully, an industry is emerging that makes it easier than ever. And it’s about to take off.

Professional networking.

Okay, you’re probably thinking “Isn’t the professional networking market already saturated?”

Absolutely.

That’s why a new wave of startups are shaking things up and re-introducing us to the old-school art of professional networking. These companies have designed brand new platforms that make meeting industry professionals exciting and worthwhile.

One startup that we have our eye on is Shapr.

This startup’s platform aims to take the challenge out of growing your network when it comes to professional connections. Shapr gives users an easy-to-use app that uses an algorithm to suggest professionals with matching interests, skill sets, and professional goals. Different than existing business networking platforms like Linkedin, Shapr is built for users who want to meet in person.

Their goal? To get users into the habit of meeting one new person each week.

This startup is what we call a “small, but mighty” company here in The Boardroom. Only a few years old, Shapr has amassed $16.5 million through 4 rounds of funding. Their post-money valuation is upwards of $10 million.

But wait – professional networking isn’t just reserved for businessmen and executives.

Professional networking startups cater to creatives, too.

One startup that is in the crowdfunding stage is Vampr. This 4-year-old startup is a social networking platform for creatives in the music industry. Their mission is to be the next Linkedin for creatives. So far, Vampr has facilitated over 4 million professional connections across 198 countries, earning them a spot on Apple’s “Best Apps of 2017” list.

Vampr is the first platform of its kind for musicians to connect with other musicians and industry professionals and collaborate on projects.

Vampr is one of many startup networking platforms ready to partner with investors to revolutionize the way we build business through networking.

Ultimately, professional networking startups are all about servicing niche communities. A prime example of this is Voyage Media, a user-generated entertainment media community platform. Voyage Media aims to democratize access to Hollywood by connecting storytellers outside of the “Hollywood System” with A-list producers.

So far, 7 film and tv projects have been produced by Voyage Media storytellers and producers. One of those projects won an Emmy.

As you can see, there are startups in this industry that are ready to interrupt the stagnant professional networking market. From what we’ve seen so far, we think these emerging startups have major potential to turn the industry on its head.

 

Communication Tools

This next category of Niche Networking is unique because, while these platforms may not be for networking specifically, they’re taking on the feat of modernizing how we communicate with our existing network.

Networking isn’t just about having a place to connect with others. It’s also about how we communicate and stay connected. Without the right tools, networking can feel like an uphill battle.

In the fight to keep us connected, startups in the Niche Networking sector are curating easy-to-use platforms and applications that incorporate everything we could possibly need to stay in touch and optimize performance in the workplace. Geared toward business professionals and large groups, these startups have created comprehensive networking platforms equipped with SMS capabilities, email, file sharing, scheduling software, and more.

If you’ve ever worked with a team or in a large corporation, you know how vital it is to have everyone on the same page at all times. These startups are making it easier to do that.

As of 2019, 77% of enterprises use some sort of cloud-based software (like Slack, Asana, and Trello) to handle communication and operations in their business and 15% plan on adopting a cloud-based networking software in the next 12 months. For just a minute, think of those numbers from an angel investor’s perspective – that’s 92% of companies who could potentially use the software created by the next big startup.

The workplace collaboration software company, Slack, has built an empire valued at $7.1 billion. Their software offers real-time messaging and file-sharing and is also equipped with the capability of connecting with your company’s pre-existing software and tools such as Google Drive, Google Calendar, Asana, and the Adobe Creative Cloud. One of the first companies to create such a platform, the startup brings in an annual average revenue of $400.6 million.

Obviously, you won’t be investing anymore in this billion-dollar unicorn. But there are a bunch of open deals with startups that are making big moves and big money.

If you’re a regular attendee of conferences, seminars, or events, you’re going to want to download Swapcard now.

Swapcard is an intuitive event app backed by artificial intelligence. The app suggests sessions to attend, relevant people to meet, and sponsors to visit. Based on your interests, Swapcard recommends things to do and people to meet so you can optimize your time and get the most out of your experience.

Swapcard isn’t just for attendees, either.

Event hosts can also use the app to give guests a 360 view of the venue and vendors, access to the schedule, and post important announcements in real time. While they’re still in the seed phase, Swapcard has raised over $5 million from two funding rounds since 2013 and had $2 million in revenue in 2018.  

Swapcard is one of the first companies of its kind to create this type of AI event software.

Another up-and-coming startup is called Coda. Backed by $60 million from 1 funding round and a valuation of approximately $500 million, Coda’s platform combines important applications like messaging, file sharing, and document creation under one roof.

Here at The Boardroom, we are definitely going to keep our eyes on this industry as we wait with anticipation for the next startup that will take the challenge of beating out the current market leaders.

Conclusion

Niche Networking is home to many great investment opportunities, as the market is fresh and ready for a new wave of innovation.

The major players we see now were the first of their kind to revolutionize networking. And many of the innovators who followed in their footsteps have since been bought out. Some of the richest people in the world today got their money from the sale of their investment.  

What does that mean for investors like us?

That means that there is nowhere to go but up in this emerging Niche Networking industry.

If these numbers don’t already speak for themselves, take a look at the up-and-coming startups on the verge of taking off in the Niche Networking sector. Whether you’re keen to invest in the next big professional networking platform or you’re passionate about investing in genuine interpersonal connections, I’m certain you’ll find an incredible deal that ticks all the boxes.

But to access the incredible opportunities that are waiting for you out there in the world of Niche Networking, you need the experts.

No worries, we’ve got your back.

Come see us at The Boardroom and learn what successful angel investing is all about. We’re here to provide expert advice and all the resources you need to turn your dollars into deals.

Click here to learn more about becoming a member of The Boardroom.

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

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