The Peak Open Interest Indicator
The Peak Open Interest Indicator (POI) has predicted where the S&P 100 Index (OEX) will close on options expiration day with a high degree of accuracy. The OEX tends to be attracted to price levels where the largest amount of open interest exists. The indicator is simply a chart showing the amount of call and put options open at each strike price in any given expiration month. Typically, a stock or index will be attracted to the strike price that has the most combined open options contracts for the front month, or the month closest to expiring. What makes this indicator particularly useful for the OEX is its low implied options volatility. Below is a chart of the POI for July 13, 2004 showing the OEX strike price with the greatest, or peak, open interest.
A review of some previous months' options activity illustrates how the indicator functions. February's expiration saw the OEX close at 564.88, only -0.90% from peak open interest at the 570 strike level. In March, the 550 strike held the most open interest. The OEX was once again attracted to that strike level, this time closing at 543.88, or just -1.15% away. In fact, over the past 19 months, the OEX has closed no more than +/-1.6% from its peak strike price at expiration.
| Expire | "Target" | "Actual" | Pt Diff | % Diff |
|---|---|---|---|---|
| 18-Apr-03 | 450.00 | 453.72 | +3.72 | +0.83% |
| 16-May-03 | 480.00 | 475.72 | -4.28 | -0.89% |
| 20-Jun-03 | 500.00 | 502.40 | +2.40 | +0.48% |
| 18-Jul-03 | 500.00 | 501.50 | +1.50 | +0.30% |
| 15-Aug-03 | 500.00 | 498.30 | -1.70 | -0.34% |
| 19-Sep-03 | 520.00 | 520.62 | +0.62 | 0.12% |
| 17-Oct-03 | 520.00 | 518.12 | -1.88 | -0.36% |
| 21-Nov-03 | 520.00 | 511.78 | -8.22 | -1.58% |
| 19-Dec-03 | 540.00 | 540.26 | +0.26 | +0.05% |
| 16-Jan-04 | 560.00 | 564.72 | +4.72 | +0.84% |
| 20-Feb-04 | 570.00 | 564.88 | -5.12 | -0.90% |
| 19-Mar-04 | 550.00 | 543.68 | -6.32 | -1.15% |
| 16-Apr-04 | 560.00 | 554.94 | -5.06 | -0.90% |
| 21-May-04 | 530.00 | 534.34 | +3.34 | +0.63% |
| 18-Jun-04 | 550.00 | 554.80 | +4.80 | +0.87% |
| 16-Jul-04 | 530.00 | 535.90 | +5.90 | +1.11% |
| 20-Aug-04 | 530.00 | 536.04 | +6.04 | +1.14% |
| 17-Sep-04 | 550.00 | 545.80 | -4.20 | -0.76% |
| 15-Oct-04 | 540.00 | 531.80 | -8.20 | -1.52% |
| 19-Nov-04 | 560.00 | 559.69 | -0.31 | -0.06% |
The peak strike level will obviously change as expiration draws closer. But that does not diminish the usefulness of this indicator. Of note is the fact that the peak strike level does not normally changed at least one week prior to expiration. One strategy employing this indicator is to put on either a bearish call spread or bullish put spread. For example, in February-04, a trader could have put on a bullish put spread, selling the Feb 560 Put and simultaneously buying the Feb 555 Put. The spread credit was good for $190 per contract. Since the OEX closed at 564.88 and above the 560 strike, both puts expired worthless. The trader would have received the full credit amount less commissions. A $5,000 investment (10 contracts) would have returned $1,900 for a 38% gain. The March peak open interest settled at the 550 strike during the last week before expiration. We recommended opening a Bullish Put Spread, selling the Mar 540 Put and buying the Mar 535 Put, for a $1.35 credit. Since the OEX closed at 543.68 on expiration, both of our options expired worthless and we captured the full credit, less commissions. We were only "in the market" for four days and realized a 27% return on the trade.
The April-04 peak open interest settled at the 560 strike during the last week before expiration. We recommended opening a Bullish Put Spread on Tuesday, April 13th, selling the Apr 550 Put and buying the Apr 545 Put, for a $1.30 credit. Since the OEX closed at 554.94 on Friday, both of our options expired worthless and we captured the full credit, less commissions. We were only "in the market" for four days and realized a 26% return on the trade.
Advantages of the POI System
The POI system has a number of advantages over buying call or put options. Most options traders end up losing money due to the inherent difficulty of consistently being on the right side of the trade and the fact that options are "wasting assets". The POI strategy overcomes most of these disadvantages by:
- Has had 92% winning trades in 25 months of real time options trading.
- Has the goal of providing you with a steady monthly cash flow stream.
- Consistently returns an average of 13.4% on investment each month.
- Auto Trading available with ThinkorSwim, the premier online options and stock broker.
- Email Alerts give you the exact trade set-ups. No guesswork involved.
- No need to "watch the market". Place your trades according to our instructions and then go about your normal business.
The PeakInvesting site includes our successful POI strategy, covered call writing, our proprietary Options Volatility Analysis and SPX Forecasts. And now with Auto-Trading, its the best options site on the web. Sign-up for your Free Trial and receive both our Weekly and monthly POI credit spread recommendations.