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American Capital Agency Corp. Message Board

  • farmapharma farmapharma Jun 6, 2012 6:28 PM Flag

    OT: Interpreting open interest

    Question for the options gurus on this board.

    How do I interpret Open Interest numbers for options in a stock?
    For example, as of 6/6,
    Open interest on AGNC Dec 28 calls is 0, on AGNC Dec 28 puts is 141.
    Open interest on AGNC Dec 30 calls is 207, on AGNC Dec 30 puts is 1034.
    Open interest on AGNC Dec 32 calls is 789, on AGNC Dec 32 puts is 61.

    I realize these are snapshots, constantly changing. How can I use this number to gauge whether the prevailing bias is bullish or bearish and projected price action heading into expiration.


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    • Long story short, if significantly more calls are ITM for the expiring month, stock price tends to drop. The opposite is true if significantly more puts are ITM.

    • From a technical stand point, this makes sense. For example, if you bought calls (long) that are now ITM, the MM sold them to you (short) and then purchased shares of stock to correspond to the delta. When you sell your ITM option to collect the fatty premium, and close your position, the MM does the opposite. Buys the option back to close, and sells his shares to cover your profit. The selling of these shares affects the stock price. As more investors close positions, the stock price gets driven to the strike where maximum equilibrium is achieved. Remember that when the stock price is falling, more puts are coming into the money.

    • Correction: May op ex. Too much coffee this morning.

    • In march this worked like a charm. Note where the plunge stopped on op ex. Sometimes its the day before as traders roll out of existing positions. Watch option volume as well.

      Open interest (for expiring month) indicated this move all the way into op ex.

    • Hey FarmP,

      This info, IMO, is much better than YBF's attempt. He has many misleading statements that can be examined for merit, in this simple, concise, informative, few paragraph explanation from Wiki. I found this site very useful, years ago, when pondering open interest.

      Great boxed eg at bottom of the page, which speaks directly to your question.

      Hope it helps,


    • Open interest is simply long positions that haven't been closed or exercised. If you see a knot of open positions at strikes nowhere near the current stock price it means only that the stock was formerly near that price and something interesting was happening.

      If you see a knot of open positions at strikes near the current stock price it only means that people are trading normally.

      If you see half a million open positions it means we're very near ex-div and someone has entered into dividend-trade strategy:

      In your particular example, it could be that someone has opened a bunch of strangles with Dec 30 Puts paying off the downside moves and Dec 32 calls paying off the upside moves. Or it could be random people playing OTM options, some of which are no longer OTM.

      The apparently low open interest on the Dec 32 Puts is interesting. You'd think people would think 32 was an easy get with a div and a SPO coming. The premiums must be consistently outlandish.

      What will happen close to expiration (minutes, not hours or days) is that the nearest strike that is ITM will become a magnet. People long those options will prefer to lock-in their remaining value rather than risk losing it to a blip in the stock price (or, indeed, to the expecation that others think the way they do about their options). They will turn-and-burn. If they are playing calls, the exercise has no effect on the market price, but the sale does. With a number of contracts closing in a narrow window, it will drive the sale price down towards that strike. Puts would do the opposite to pull it up.

      Since this is June and not December, and since the price is already close to 33, I think the numbers you've posted won't have any bearing at all on the stock price for quite some time.

      Still a week-plus to expiry, and a likely div announcement to go, yet, so the 32's probably won't play. It's likely we'll be low-33's at a minimum, and see the Jun 33 calls pull it down next Friday, but if we're high-33's watch for the Jun 34 Puts to pull it up.

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