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.
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/
Options pricing models produce theoretical values for options and implied volatilities. Here we show common methods for calculating IV and how to interpret them.
Implied volatility, contango, and forward volatility can be used to predict underlying movement. Ex-earnings IV for stocks is explained. Backwardation is described as is the flat volatility method.