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Can Options Volume Predict a Pin?

0DTE 0ptions Volume is a valuable tool in our decision-making process, providing insight into sentiment, expected trading ranges, profit targets, and pivot points.

However, can this data help us determine where the market might pin?

Most days, the answer is no. Options volume is too dynamic, with the Max Call and Max Put shifting throughout the day. For instance, participants may start positioning further out-of-the-money in the morning but move closer to-the-money as the day progresses or may continue to position further out-of-the-money as a trend begins to form. 

However, there is one scenario where we can use options volume to gain edge in predicting market pinning. This occurs when the Max Call and Max Put are both positioned close to-the-money relatively early in the trading day, typically by 1:00 PM ET and within a 20 point range. When participants position close to-the-money, it reflects expectations for lower future volatility.

Think of the Max Call as the upper bound, the Max Put as the lower bound, and the mean of the range as "fair value."

Fair value represents the equilibrium point between market demand (Max Put) and supply (Max Call) - a price both bulls and bears can agree upon. If there hasn't been any intraday catalyst sparking a change in sentiment, the market tends to revert to fair value by close. In such conditions, the mean of the range should be seen as a potential pin candidate.

Market Scenario

On February 23, 2024, market internals were neutral to positive with no economic releases to spark a sentiment change. The upside was capped by the Call Wall at 5100, and the downside was limited due to positive gamma (+700M) and volatility contraction, with the VIX down 5%. On a net basis, there were many mixed to neutral signals.

Initially, participants positioned further out-of-the-money, with Max Call at 5130 and Max Put at 5060. 

However, throughout the morning these strikes continued to move closer to-the-money and by 12:30 PM ET, the Max Call lowered to 5100 (bearish) and Max Put rose to 5080 (bullish).

The market traded around the 5095/5090 zone for the majority of the day with minimal volatility, settling at 5088 by close - the mean of the range. 

The cycles played out, and levels were responsive, however, under these conditions, opportunities were limited due to the tight range. Nevertheless, short volatility or market-neutral strategies, like selling a credit spread, iron condor outside the range, or using an ATM butterfly centered at the mean, presented potential opportunities.

Our preferred approach is typically to trade out-of-the-money butterflies due to the more favorable risk-reward ratio, although this can be a losing strategy if there is no volatility or indication of future volatility. This is where you need to consider the at-the-money butterfly strategy, which may not offer the most attractive risk-reward ratio. However, in these scenarios, it can be relatively safe, especially in the final hour of trading. In this scenario, you would sell the mean of the range at 5090 and select the 5100 Max Call and 5180 Max Put as the long strike, which offers a strategy for capitalizing on market neutrality and potential price consolidation.

If the market happens to break the Max Call or Max Put near the end of the day, you can always stop out, resulting in minimal losses. Therefore, utilizing a strategic stop-loss will actually result in a higher risk-reward ratio than stated, with a relatively high probability of profit, particularly if entered near the end of the day (less time = more certainty) and if there are other supporting variables.

Learn more about Options Volume, 'here' and 'here'.


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