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Strategies & Market Trends : Technical analysis for shorts & longs
SPY 679.68+0.7%Nov 26 4:00 PM EST
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To: ynot who wrote (23273)8/31/1999 11:31:00 AM
From: Johnny Canuck  Read Replies (1) of 68378
 
ynot,

I find that options active has a direct effect on the price about a week before options expiration. Option trader start to row over into options further out or option writers start to buy/sell stock to hedge their positions. Note that professional option writers typical will write put and then sell the stocks short to hedge a portion of the position or they will write calls and then buy a stock to hedge the position. It is all about risk management. Remember they make money if the options expire worthless.

The rest of the time options tend to be a reflection of the news or expected movement on the stocks price. Most option writers are good at gauging the short term risk.

When I use options activity I tend to use options as a short term contrarian indicator. An increase in put interest when the price is dipping indicates that the writer thinks that the stocks has fallen as far as they think it will go. Similar a call writer will write call options when they think a stock price advance has hit a congestion area. The thing to track is the total number of contract outstanding for the call and puts (the open interest). What is important is the change in open interest. The total number of open contracts typically tells you a lot less. There are some pay services which allow you to download data on open interest every day for individual stock.

Hope this helps.

Harry
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