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Options Volume and Open Interest

The trading environment has been changing rapidly due to many factors among which are social media influence and involvement of retail traders in the options market. As the January 2021 events demonstrated (extreme movements in names like GME and AMC), the new market environment can drastically impact the equity space and its participants.

We have a new participant in the market – the retail actor – that can organize through discussions in various groups and chat rooms and subsequently trade using higher leverage instruments on underlying stocks (e.g., far Out-of-The-Money options) usually present in portfolios of institutional funds. Institutional portfolio managers and traders need to be aware of the names to help measure risk or opportunity.

We will explore some of the data and analytics – option volume, open interest, implied volatility, and skew – available in the SpiderRock databases. Incorporating these options datasets can augment traditional equity portfolio factor analysis and lead to enhanced alpha in strategies by identifying companies with critical market activity similar to what we saw in January 2021.

In the following, we show how to extract, construct, and interpret these options data points so they can be used directly in discretionary investment decisions or supplement equity alpha signals based on both fundamental information and AI/machine learning algorithmic models.

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