Some Thoughts on SPY Open Interest

Analysis of options market data is one of the most effective means of determining market sentiment at any given time. Commonly followed data are the ratio of the volume of puts traded relative to calls in various securities, as well as the open interest of option contracts. I like to keep an eye on the areas of heavy/maximum open interest in the options for SPY and QQQQ. Those ETF options are the primary options used for hedging by large traders.

In the Feb series of SPY options peak call open interest is at the 90 strike and a slightly lesser peak at the 88 strike. I like to look at call open interest over put open interest because I feel it will give a better idea of pure speculation on market upside. Since SPY is currently valued around 83.00, it seems there is some speculation in the options crowd that prices will move up quite a bit in the next 2 weeks. Again, the principle to follow here is to go against the crowd.

There is significant put open interest at the 80-82 strikes just below market prices. That could be a cushion for prices (and may partially explain the repeated support in that area the last week or two), but if prices do fall below 80, then the next area of peak support is at 73, though we may be approaching the March contract at that point.

As a side note on the open BGZ trade, if/when SPY is able to close below 80.00, then we should be safe to place a breakeven (or better) stop loss on the trade to largely take the emotion out of the trade and let things unfold over the next several weeks. For right now, some room needs to be allowed while the many traders/investors throw in the towel, so to speak.