S&P 500 E-mini FuturesEducation
Options flow predicting moves on Derivatives (Futures)
Options have been and are an important instrument on the financial market for a trader trading Intraday Futures. Therefore, while exploring the mechanics of the option market over the last several months, as a result of work, indicators were created that load data from Quandl and then look for patterns that may herald a change of direction on the derivative market - in this case Futures Contracts. There are two main types of Options:
By observing the market volumes of both types of Options, we can observe the sentiment of investors. The key factors are which volume (call or put) prevail in the volume and the dynamics of the volume - what is the trend on volume, whether the difference between them increases or decreases. In addition, the Put / Call Ratio analysis allows you to confirm or negate the signals from the Option volume. The Ratio indicator behaves inversely to the price movement - in the case of a bearish sentiment, we expect the ratio to increase, and in the case of bullish sentiment - the indicator should decrease. If the Ratio follows the price in the same direction, it is an anomaly.
Of course, the mere observation of the Option volumes and the Put / Call ratio is not sufficient, as the Options Market is a much more complicated activity. It is worth including in the calculations such factors as Expiration Date, Bonus Amount, option type (In the Money, Out of Money or At the Money). Not each of the factors is equally important, therefore the key is additionally the appropriate selection of the weighting factors. For this purpose, due to the multitude of data, it is worth using Machine Learning, which I also do by saving the resulting data in a dataset in Quandl and displaying the data in TradingView using Pine Script.
Below are some additional examples from recent sessions on ES showing the predictive nature of the Option sentiment, often preceding major movements in the ES index (during the spot session):
First, from the left, the session from November 15 is shown and an opportunity to play Short. On the right, the session from November 16 and an opportunity to play the Long position this time.
Session from November 10, where we first got the Bull's signal, and at the top we got a warning signal of traffic reversal and the possibility of entering Short:
And one of my favorite moves on November 3:
- CALL - allow their owner to buy a given product in the future at a predetermined price (Strike Price)
- PUT - allow you to sell this product at a predetermined price (Strike Price)
By observing the market volumes of both types of Options, we can observe the sentiment of investors. The key factors are which volume (call or put) prevail in the volume and the dynamics of the volume - what is the trend on volume, whether the difference between them increases or decreases. In addition, the Put / Call Ratio analysis allows you to confirm or negate the signals from the Option volume. The Ratio indicator behaves inversely to the price movement - in the case of a bearish sentiment, we expect the ratio to increase, and in the case of bullish sentiment - the indicator should decrease. If the Ratio follows the price in the same direction, it is an anomaly.
Of course, the mere observation of the Option volumes and the Put / Call ratio is not sufficient, as the Options Market is a much more complicated activity. It is worth including in the calculations such factors as Expiration Date, Bonus Amount, option type (In the Money, Out of Money or At the Money). Not each of the factors is equally important, therefore the key is additionally the appropriate selection of the weighting factors. For this purpose, due to the multitude of data, it is worth using Machine Learning, which I also do by saving the resulting data in a dataset in Quandl and displaying the data in TradingView using Pine Script.
Below are some additional examples from recent sessions on ES showing the predictive nature of the Option sentiment, often preceding major movements in the ES index (during the spot session):
First, from the left, the session from November 15 is shown and an opportunity to play Short. On the right, the session from November 16 and an opportunity to play the Long position this time.
Session from November 10, where we first got the Bull's signal, and at the top we got a warning signal of traffic reversal and the possibility of entering Short:
And one of my favorite moves on November 3:
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