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Our Interest In Open Interest
Author: James Brumley (info)
Website: http://bluegrassportfolio.com
Posted: June 28th, 2007 at 9:07 am EST
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Regular readers will probably remember our options expiration ‘max pain’ theory. Basically, the idea is that upon option expiration, the maximum pain that investors can experience will indeed be the amount of pain experienced. In other words, however the market can close so that most options expire worthless, it will. So, by looking at where the majority of the open interest lies slightly before an expiration, you may be able to get a good feel for where things will end up by the time expiration gets here.
But wait a second….didn’t we just go through June’s expiration? Aren’t we past that point?
Well, no. We went through June’s monthly option expiration. However, don’t forget that the CBOE has started trading quarterly options on some instruments. The quarterly options expire at - lo and behold - the end of the last month of the quarter. As it just so happens, June is the last month of the quarter. So, we’ve got one more batch of open interest to think about before we forge ahead into Q3.
As usual, we’ll be looking at the open interest for the NASDAQ 100 Trust, more commonly called the QQQQ’s. They’re highly traded and very liquid, and may best represent the majority of the market’s participant’s bets.
In any case, the table (as of Tuesday) is below. The majority of the calls have a strike of 48.00, while the majority of the open interest on the put side of the table have strikes of 47.00. Theoretically the max pain would occur somewhere between there….where both of those groups would expire worthless. That being said, we see a lot of 47.00 calls and a bunch of 46.00 puts. Though not the big centers of gravity, their open interest may tug a little bit too. So, based on the model, the QQQQ’s “should” end the week somewhere slightly above 47.00.
Anyway, this is as much for fun as it is for strategic purposes. However, the growing open interest in these quarterlies is making this tool more and more meaningful. We’ll continue to watch it and see if it has any merit. Just something to think about. The one caveat is that the open interest levels may change between now and Friday. So, you may want to follow it yourself between now and then.
QQQQ Quarterly Option Open Interest
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James Brumley, Options, Trading
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