A Quick Dirty Guide On How To Trade Like A Pro Using Options Data To Augment Your Trading.

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Today, we will dive into “A Quick Dirty Guide On How To Trade Like A Pro Using Options Data To Augment Your Trading." 👇

A quick dirty guide on how to trade like a pro using options data to augment your trading. If you are trading stocks, options, or futures market. This will help you give you an edge in the market.

Here are some of the things you will learn:

• You will learn how to find trading ranges and also how to trade off the balance area

• You will learn how to form market bias and give you a clearer picture of the market, which will allow you to really amp up your trading, because your effectiveness goes way up and your doubts and 2nd guesses go down. Allowing you to trade at optimal levels compared to trading with uncertainty. When you know the direction the market wants to go, it elminates alot of the guessing, which allows you to focus on your entry.

• You will get much better at trading reversals

• You will know market sentiment and also where it can pick up momentum if it can hold a certain level.

— — — — — — — — — — — — — — OK SO LETS GET STARTED — — — — — — — — — — — — — — 

Half the people reading have no idea what call/put walls are. The other half knows what they are but probably dont fully understand it. I’ll explain what they are and also how to use them in trading.

Most of the definitions on call/put walls are not that detailed, which is why some of you who understand what they are, still dont fully understand the nuance they provide. However I did find a site that explains them pefectly. We will be using their explanation and also research and then I’ll go into how to utilize that information.

You can read just the “basic points” but I would advise you to read the whole thing. So you can have a better grasp of how they work. We will go over call walls first, followed by put walls and then I will explain how to use them and other tricks.

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Call Wall

Basic Points

• The Call Wall is the strike with the largest net call gamma. (The highest open interest)

• This is one of our most important key resistance levels. It holds a majority of the time.

• Call Walls are essential in our daily levels analysis.

• Their main function is that they define the upper bound of the wider probable range.

• The direction that walls shift overnight is a strong directional signal: up equals bullish and down equals bearish. This is often what we are keeping the closest eye on while waiting for a bullish signal from the market.

Intermediate: Analytic Use Case

In general, we would use a Call Wall for identifying resistance, and expect the price to slow down if rising into this level. Here is a sample of our research on Call Walls here, showing how the price will sometimes rise a bit past the Call Wall, but usually sink back underneath it the next day.

Advanced: Call Walls and Gamma

Call Walls tend to have a sticky gamma effect, which ultimately means it can be difficult for the price to break through them. From there, the price tends to reverse or stick in a tight range (a pin). But when Call Walls lift up, structurally this makes it easier for the market to climb up to that new resistance level.

The mechanism which explains this sticky gamma effect is how dealers being long gamma (favorably accelerating directional exposure) will have the size of their position dynamically increase when they are significantly correct about direction. After a sharp move increases their size in a profitable way, such as shooting up, then they can sell some of the underlying security to get their directional exposure closer to neutral. Doing so would lock in profits for them. This is the explanation for why dealers will trade in the opposite direction of the underlying when positive gamma, a dynamic which mutes volatility and therefore creates a pin.

Put Wall

Basic Points

• The Put Wall is our major support level, which measures the most amount of put gamma. (Highest open interest).

• Our data shows that the Put Wall offers strong support, but it is not quite as strong in equivalence as the Call Walls are in being a resistance point.

• The Put Wall is often a point where buyers will enter the market.

• It is also a point where put holders are likely to close their positions for a profit.

Intermediate: Interpreting the Put Wall

In general, the Put Wall level is the lower bound of the probable trading range. A change in the location of the Put Wall can help to manage your risk while either long or short by adjusting the strikes or stop losses (preset exit points to accept a potentially max loss). If going long, it is common to set a stop loss under a major support level such as a Put Wall.

Like our other key levels, a shift higher is a bullish signal while a shift lower is a bearish signal. However, it only suggests a probabilistic advantage and should ideally be combined with other analysis for the best effect, such as checking to see if support aligns with strong combos (closer to 1), high liquidity (many limit orders on the same price point), and strong nodes on a volume profile (very high volume levels on the same price point).

NOW YOU KNOW WHAT A CALL/PUT WALLS ARE AND ALSO ITS CHARACTERISTICS!!!!!!

Lets get into how to utililze this knowledge to give you an edge:

First thing we want to use this data for is to find the trading ranges for the day. Also where the market opens is going to help form market bias. The easiest to understand is how the walls are formed. These walls can simple be thought of as support and resistance. However if you understand the nuance of how gamma works, you can also figure out how strong the momentum of breaking certain levels will likely to be in terms of movement and also price/volume pick up.

So to simplify it for the dummies

call walls and put walls are strong support and resistance levels. This is also where most of the net gamma is located and if there is additional gamma lined up, you got rocket fuel if it can hold above that level for 15min.

Gamma is basically the amount of gasoline or if your doing yolo’s, its the rocket fuel to the moon. However we will mostly skip gamma except to say, when you pick up gamma, your adding fuel to the move. The amount of fuel helps give you an idea of how much push there is. I dont want to go over more then that for gamma, since Im not trying to write a novel, but you should get the gist of it.

So lets get into how to find call walls and put walls.

1. open up any options brokerage platform. Find the biggest open interest for call options for that day aka 0 DTE options. Your going to want to check it about 10 minutes before market opens. If you dont have access to options data, then you can also use websites such as Barcharts.

2. Once you locate them and add them to your charts. It will look something like this.

(The space between the two is the trading range for the day, if the market opens inside of the range)

If the market opens above or below range , you will be moving in that direction and also the walls will act as bounce points. If your opening inside of the range, that is your trading range for the day. So here is that concept in action via pic. So you can get a better illustration of how this works.

The chart below is over multiple days:

You will notice anytime the market opens inside of the range, that will become the trading range for the day. If it opens above or below the range, you will be moving in that direction.

Notice how these opened above the range. It will move/hold above that level for the day. Also note that it can act as a really good bounce spot, if it ever does come back to that line.

The same concept works for put walls and if you open below them. What happens if the call/put walls are in the same location, as you can see in one of the days from above. That means market was undecided before market open. Usually on days like this, it can be initially be more volatile even though we know the direction of where its going. This matters because volatility matters in terms of how often we can get stopped out on days like this until you see capitulation from one side. So either pick a really good entry or have wider stop losses. If you open above the call wall, most likely the bears will try to fight it, but then end up losing. Vice versa for if it opens below the call/put wall.

Forming a market bias along with other tools in your box:

Lets say you open inside the trading range, depending on where in the trading range, you will know how much room it has to move on each side. So if you open at or near the bottom of the range, you know you should be looking for price action to enter on the long side. Same with if the market opens on the high end of the box, you will want to look for shorting opportunites.

Another key factor to note is that not only can you increase your win ratio, but also the gains made, becuase most likely your going to be able to

1. hold your position more confidently

2. More importantly the amount of space it can run is bigger. So instead of taking a normal 8 or 10 point scalp on NQ. You could target 16 pts and 20 pts. Just this aspect alone will increase the amount of profitable days, even on days where your win ratio is less then 50%.

Now lets discuss the mid point of the trading range. This is not as strong as call/put walls, but its something to keep in mind when trading. The 50% area of the trading range will act similar to how VWAP works. Also roughly 60% of the time you will see a bounce/rejection. So even if you blindly fade the 50% zone, you will win almost 60% of the time. I would need more then that to enter a move to fade, however if you blindly faded this everytime, you would still be profitable at the end of the month, as long as your risk parameters were in place. So here is a illustration for those who like pictures better.

I would use confluence with VWAP or POC to make this better work from a techincal side and I would use trend from macros such as dollar/yield/ vix to help better gauge the situation. To enter a trade, I would rely on price action, however knowing all this info will help you interpert the data more correctly. Allowing you to be correct more often and faster on the trigger as well. A quicker entry allows for bigger profits and usually better stops.

Another way to get a general idea of a trading range is to use expected move. This is not as useful, but does give a general idea. Also its dynamic so it wont stay the same the whole day. Basically what this shows is the probability the market closes inside of the expected range. 70% to be inside at market close and 30% chance to close outside of

THE FINAL TOPIC ON OPTIONS: option expiration and a theory called max pain.

Some of you may have heard terms such as quad witching. Just knowing that options expire at certain times will increase your chance as a trader, because now you know there will be huge volatility on those days. For in-experienced traders, its best to sit out and protected your profit. Because sitting out CAN BE A MONEY MAKING PROPOSITION. Same with knowing when futures roll over. Same with economic data that comes out. Just knowing something as stupid as that, allows you to either sit on the fence or trade knowing it will be more volatile then usual.

The last part of this is called max pain. Max Pain is a theory that market makers on option expiration will try to move the market in a way where they dont have to pay out as much. This is a nuance subject, so im just gonna give you the basic definition, so you know what it is and also where to look for more information on how to use this information. I use max pain on friday weekly option expiration, but its nuanced and you just have to have a eye for what the market is trying to do. I would not recomend most people to use max pain theory, until you got more experience and knowledge. Also having a good intution also helps.

Here is a definition and examples of max pain from investopedia:

What Is Max Pain?

Max pain, or the max pain price, is the strike price with the most open options contracts (i.e., puts and calls), and it is the price at which the stock would cause financial losses for the largest number of option holders at expiration.

The term max pain stems from the maximum pain theory, which states that most traders who buy and hold options contracts until expiration will lose money.

KEY TAKEAWAYS

• Max pain, or the max pain price, is the strike price with the most open contract puts and calls and the price at which the stock would cause financial losses for the largest number of option holders at expiration.

• The Maximum Pain theory states that an option’s price will gravitate towards a max pain price, in some cases equal to the strike price for an option, that causes the maximum number of options to expire worthless.

• Max pain calculation involves the summation of the dollar values of outstanding put and call options for each in-the-money strike price.

Understanding Max Pain

According to the maximum pain theory, the price of an underlying stock tends to gravitate towards its “maximum pain strike price” — the price where the greatest number of options (in dollar value) will expire worthless.

Maximum pain theory says that the option writers will hedge the contracts they have written. In the case of the market maker, the hedging is done to remain neutral in the stock. Consider the market maker’s position if they must write an option contract without wanting a position in the stock.

As the option expiration approaches, option writers will try to buy or sell shares of stock to drive the price toward a closing price that is profitable for them, or at least to hedge their payouts to option holders. For instance, call writers will want the share price to go down while put writers would like to see share prices go up.

About 60% of options are traded out, 30% of options expire worthless, and 10% of options are exercised. Max pain is the point where option owners (buyers) feel “maximum pain,” or will stand to lose the most money. Option sellers, on the other hand, may stand to reap the most rewards.

The maximum pain theory is controversial. Critics of the theory are divided whether the tendency for the underlying stock’s price to gravitate towards the maximum pain strike price is a matter of chance or a case of market manipulation.

Calculating the Max Pain Point

Max pain is a simple but time consuming calculation. Essentially, it is the sum of the outstanding put and call dollar value of each in-the-money strike price.

For each in-the-money strike price for both puts and calls:

1. Find the difference between stock price and strike price

2. Multiply the result by open interest at that strike

3. Add together the dollar value for the put and call at that strike

4. Repeat for each strike price

5. Find the highest value strike price. This price is equivalent to max pain price.

Because the max pain price can change daily, if not from hour to hour, using it as a trading tool is not easy. However, it is sometimes valuable to note when there is a large difference between the current stock price and the max pain price. There could be a tendency for the stock to move closer to max pain, but the effects may not be meaningful until expiration approaches 1. 

Example of Max Pain

For example, suppose options of stock ABC are trading at a strike price on $48. However, there is significant open interest on ABC options at strike prices of $51 and $52. Then the max pain price will settle at either one of these two values because they will cause the maximum number of ABC’s options to expire worthless.

I hope I helped you understand how to use options data to help augment your trading. Happy Hunting!!!!