Indicators
Sunday, August 11th 2019
Open Interest Case Study on Dropbox (DBX)
Open interest is an important data set and shows when an options contract is opened. We show a case study of Dropbox stock around earnings.
Summary
This case study on Dropbox stock shows how to use open interest to analyze options contracts. By tracking open interest and implied volatility, it was determined that there was buying of put options before a significant drop in stock price. Open interest is defined as open contracts between buyers and sellers, while volume is each trade.
ORATS.com has histories for all options open interest and individual options open interest that you can pull up manually in Excel or via an API using Python or similar.
Dropbox was in the unusual options volume report we publish and presents a good case study how to use open interest.
We reported that the Aug-9 $21 strike put traded 4820 contracts and had open interest of 8061 contracts. We'll see tomorrow how many of these were closing thus reducing the OI.
We looped back each day to see when the open interest increased the most. That was on 8/8/19 when the open interest went up 7237 to today's 8061 contracts from 824.
Here's a snippet of historical call option interest (coi), put OI, and implied volatility at the 10 day interpolation point (iv10d).
The put open interest increased 14k or 28% from 8/8 to 8/9. To figure out if those opening puts were buying or selling we can look at implied volatility. The iv10d increased dramatically on the 8th from 82% IV the day before to 91% on 8/8/19. This looks like there was buying to drive the IV up that far.
The next day after these opening puts to buy, Dropbox sold off to $18.6 down 13%.
Robert Morse of Lightspeed has a good definition of the relationship between options volume and open interest on a EliteTrader post:
- Open Interest (OI) are open contracts between buyers and sellers with the OCC as the counterparty.
- Volume is each trade. If I buy to open and so does the seller, they increase OI. If one of us is opening and one closing, there is volume but no increase in OI. If we are both closings, there is volume but a decrease in OI.
You can see the ORATS data API here:https://docs.orats.io/data-api-guide/
Disclaimer:
The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors.
All opinions are based upon information and systems considered reliable, but we do not warrant the completeness or accuracy, and such information should not be relied upon as such. We are under no obligation to update or correct any information herein. All statements and opinions are subject to change without notice.
Past performance is not indicative of future results. We do not, will not and cannot guarantee any specific outcome or profit. All traders and investors must be aware of the real risk of loss in following any strategy or investment discussed herein.
Owners, employees, directors, shareholders, officers, agents or representatives of ORATS may have interests or positions in securities of any company profiled herein. Specifically, such individuals or entities may buy or sell positions, and may or may not follow the information provided herein. Some or all of the positions may have been acquired prior to the publication of such information, and such positions may increase or decrease at any time. Any opinions expressed and/or information are statements of judgment as of the date of publication only.
Day trading, short term trading, options trading, and futures trading are extremely risky undertakings. They generally are not appropriate for someone with limited capital, little or no trading experience, and/ or a low tolerance for risk. Never execute a trade unless you can afford to and are prepared to lose your entire investment. In addition, certain trades may result in a loss greater than your entire investment. Always perform your own due diligence and, as appropriate, make informed decisions with the help of a licensed financial professional.
Commissions, fees and other costs associated with investing or trading may vary from broker to broker. All investors and traders are advised to speak with their stock broker or investment adviser about these costs. Be aware that certain trades that may be profitable for some may not be profitable for others, after taking into account these costs. In certain markets, investors and traders may not always be able to buy or sell a position at the price discussed, and consequently not be able to take advantage of certain trades discussed herein.
Be sure to read the OCCs Characteristics and Risks of Standardized Options to learn more about options trading.
Related Posts
