Many are unaware that the entire market was built on the premise for institutions to hedge their underlying assets. This means, the entire foundation of the market is based on fundamental principles first, then technicals second. You will see i have plotted Support & Resistance lines for Open Interest Levels and key Strike Prices. You can check them out here its free and when used with TB you can execute your trades based on these great areas of interest. https://www.bantix.com/quikstrike-product-page/
Here’s how options data becomes foundational:
1. Open Interest and Volume:
Call options indicate bullish sentiment, while put options reflect bearish sentiment. By looking at where the highest open interest or volume of options is located, you can gauge significant price levels that institutions are focusing on.
For example, if you see a large number of calls at a specific strike price, it may suggest that institutions believe the asset price will move towards or above that level.
2. Put/Call Ratio:
This ratio compares the number of traded put options to call options. A high put/call ratio typically signals bearish sentiment (more puts being traded), while a low ratio suggests bullish sentiment (more calls being traded).
3. Gamma Squeezes and Option Expiry:
Institutions that sell options (like market makers) often hedge their positions in the underlying asset. If a large amount of options are close to being in the money, they may have to buy or sell large amounts of the underlying asset, causing sharp price moves—this is called a gamma squeeze.
As options near expiry, hedging activities ramp up, often leading to increased volatility around key strike prices.
4. Max Pain Theory:
This theory suggests that the underlying asset's price tends to gravitate towards the strike price where the largest number of options (calls and puts) will expire worthless. This is where market makers and institutions suffer the least loss.
5. Unusual Options Activity (UOA):
Sudden spikes in options trading volume at particular strikes, especially those far from the current price (out-of-the-money options), can be clues that institutions are positioning for a major move in the underlying asset.
6. Implied Volatility (IV) & Skew:
Implied volatility reflects the market’s expectation of future volatility. Institutions pay close attention to the skew, or the difference in implied volatility between calls and puts. If IV is rising for calls, it can indicate bullish expectations; if it’s rising for puts, it may signal bearish expectations.
1. Identify High Open Interest Levels
Open Interest (OI) refers to the number of outstanding options contracts for a particular strike price. Higher OI indicates more interest at that price level, which could act as a support or resistance zone.
Call Options: High OI at certain strike prices could indicate potential resistance levels, as market participants expect the price to hit but not exceed those levels.
Put Options: High OI at certain strike prices could indicate support levels, as institutional traders may be positioning for the price to not fall below those levels.
How to Use:
Gather OI data for both call and put options for the underlying asset (e.g., futures contract or stock).
Plot horizontal lines on the price chart at strike prices with the highest OI. These are likely to act as support (for put OI) or resistance (for call OI).
2. Monitor Volume at Specific Strikes
Options Volume represents how actively a strike price is being traded. Spikes in volume suggest short-term institutional interest at that level.
A sharp increase in volume at specific strike prices (on calls or puts) often signals that institutions are hedging positions or expecting a move toward those price levels.
How to Use:
Identify recent large spikes in options volume and plot those strike prices on the chart. They can serve as "reaction levels" where support or resistance might be found.
3. Put/Call Ratio by Strike
Put/Call Ratio at each strike helps assess whether the market is more bullish (more calls) or bearish (more puts). A higher ratio of calls at a strike price can signify resistance, while a higher ratio of puts may indicate support.
How to Use:
For each significant strike price (where volume or OI is concentrated), check the put/call ratio. Use this to adjust your support/resistance view:
High call volume at a strike → potential resistance.
High put volume at a strike → potential support.
4. Analyze Implied Volatility (IV)
Implied Volatility (IV) can give you a sense of how volatile the market expects the underlying asset to be. A sharp rise in IV for a specific strike price often precedes large moves and indicates levels where institutions are positioning for big swings.
How to Use:
Look for areas of unusually high IV at specific strike prices and mark those levels as potential areas of volatility-induced support or resistance. High IV on calls could signify resistance, while high IV on puts could indicate support.
5. Gamma Levels & Gamma Squeeze Potential
Gamma is a measure of how much an option's delta changes as the price of the underlying asset changes. When large institutional options positions near expiration are at risk of going "in the money," it can cause significant moves in the underlying asset, as market makers hedge their positions by buying or selling the underlying.
How to Use:
Identify areas with a high concentration of gamma exposure (typically close to heavily traded strike prices). Plot these levels on the chart, as they often act as short-term support or resistance, especially near option expiry dates.
6. Max Pain Level (Optional)
Max Pain is a concept where the price of the underlying asset tends to gravitate towards a level where the most options (both calls and puts) will expire worthless. This often happens around options expiry dates.
How to Use:
You can calculate the Max Pain price (where the highest number of options will expire worthless) and plot this on the chart. This level may act as short-term support or resistance leading up to expiration.
7. Plotting the Levels on a Chart
Once you’ve gathered the key data (OI, volume, put/call ratios, IV, gamma, etc.), follow these steps:
Identify Strike Prices:
Focus on the top 3–5 strike prices with the highest open interest and/or volume.
Mark Support & Resistance Zones:
Strike prices with high put open interest = Support.
Strike prices with high call open interest = Resistance.
Refine with Volume & IV:
If a strike price has both high OI and a volume spike, it's a strong level.
High IV at a certain level increases the likelihood of a large price move, making it a key zone to watch.
Monitor Option Expiry Dates:
As you approach expiry dates, the support and resistance levels from options data become even more significant due to hedging activity.
Example Workflow:
Step 1: Download options data (open interest, volume, and IV) from platforms like ThinkOrSwim, TradeStation, or from brokers offering options analytics tools.
Step 2: Look for the highest open interest strikes (both calls and puts) and plot them on your chart.
Step 3: Check options volume at key strikes, and if you see spikes, mark those levels as important.
Step 4: Refine these levels by considering the put/call ratio at each strike.
Step 5: Plot these levels on the price chart of the underlying asset as support/resistance zones.
Step 6: Watch how price reacts to these levels and adjust your trading strategy accordingly.