Open Interest and Volume Profile
By Ernie Varitimos
February 19, 2022
0:00 / 17:46
Open Interest and Volume Profile

3, 2 1. Yes. And we alive. All right. Come back into focus here. I doing friends Ernie here, and this is the zero days to expiration podcast.

All right, this is episode number 79. That means that there are 78 other episodes, just chock full of information about zero D T E, and trading in general and particularly trading the last day of expiration with options. Oh, forgot. There is one missing episode, episode number 70.

No one knows where it went. Even I don't know, but soon it shall appear. I Hope.

All right. So today's episode is about a very important topic in how we actually model our zero DTE options trades. Now it's very important that we have a good idea of where we think price might be going by the end of the day.

Now there is a theory that the max pain point or the max pain strike is where price will tend to gravitate towards because the big option sellers, the institutional sellers of options. Well, that's where they're going to make their max profit as an aggregate of all of the different sellers of options.

And it's also the place where people are going long in option. The aggregate number of people are going to find the maximum loss. So with that, all of these institutions tend to try to manipulate price, to get right to that max pain point. Now that is all great in theory, right? It works in theory, but in theory it doesn't work.

No, it works every once in a while. It's a matter of fact, last Friday, we had a nice pin trade right on. The max pain point and that worked out very well for us, but it's not a guarantee. However, one thing that you'll note about that next pain point, if you go into your options chain and look at open interest and volume you'll see, there are levels where the open interest and the volume are extraordinarily high compared to the other strikes.

And that max pain point is usually one of those extraordinarily high open interest levels, but there are others as well, and they could in fact also be max pain points. Now, today, I believe the max pain is at I believe it's at 4,400. Is that right? 4,400 or 44 59. I'd have to look, but it is definitely above the current level where we're at right now.

Now you would think, does that mean, or any that price is going to be gravitating towards that price? It might, but it might not as well. There are other levels that also have extraordinarily high. Open interest for instance, at 43 50 and also at 4,300. So those also could be places where price will gravitate towards.

Now. Here's a very interesting point.