Trading volumes are slowing down for the holiday season, and a fresh year is right around the corner…
While that’s far from ideal conditions for options trading, it’s a great opportunity for us to refocus and train up on key factors so we can hit the ground running when volume finally returns in the first quarter!
When you’ve been trading for as long as I have, it can be easy to take the basics for granted…
But even when a strong foundation is in place, it needs an inspection once and a while to make sure there aren’t any cracks that could cause us bigger problems down the road.
So while we have the game clock paused, let’s take a minute and talk about a few key factors that come into play when trading options…
Options Boot Camp: 3 Key Factors for Options Trading
Before I put on a trade, there are three key factors I need to know — especially when I’m trading options….
When I pull up an options chain, I’m most concerned with three things: price, volume and open interest.
Price is self-explanatory and volume is straight-forward enough… You have to know how much you’re going to pay and how many units have traded that day.
That leaves us with open interest… For those of you who are new to options trading, that’s the number of contracts traders purchased and are still holding at the start of the day.
For example, let’s say it’s Tuesday and I buy 10 contracts of the $5 XYZ call options and it has zero open interest. If those are the only options purchased and I don’t sell them by the end of the day… the open interest for that strike on Wednesday will be 10.
Tracking options open interest is easy. Any brokerage worth their salt provides options open interest data for free. You can also find options open interest data on financial websites and even Yahoo and Google.
Unlocking the Secrets of Open Interest
Now that we have a clear understanding of what open interest is and where to find it, we can focus on why it matters…
When open interest is high, it usually means there’s more liquidity in the market, making it easier to enter and exit an options trade at the price we want.
And that’s not all… open interest can also help us analyze order flow.
When looking at outsized options activity, we want to see volume that’s larger than the open interest — this lets us know what we’re seeing are new positions being opened and not traders exiting old positions.
Check out the quick video and let’s talk about these key factors for options trading. Also, I want to wish you and yours who celebrate a very Merry Christmas and happy holiday season to all!
P.S .Act Before This Historic Window of Opportunity Closes
As we wrap up 2022 and head into the new year, many traders are overwhelmed with fear…
Economic uncertainty, rising interest rates, political instability, the list goes on and on.
Whatever you may feel about next year…
Senior Strategist Roger Scott wants you heading into 2023 confident, prepared with the best tools possible, and with a game plan.
That’s why he’s inviting you to his one-time, special year-end event — where you’ll get his No. 1 stock for the new year…