Option Class in Trading
The option class for any security is used as a broad metric for gauging the relative interest in that security. For example, a high volume of options inside an option class indicates a high degree of market interest in that security.
The internal makeup of an option class can also be used to gauge the market perception of a security.
For example, an option class of call options with a large volume of long expiry dates at high strike prices may indicate that investors perceive some possible positive event around those expiry dates, and they are positioning themselves now to profit from a future price rise when and if this projected event occurs.
As an alternative example, a cluster of short expiry date put options with in the money strike prices might indicate that a brief downward correction in the price of a security is expected, perhaps as the result of a brief retracement of a recent price rally.
The option class is yet another broad tool that traders have at their disposal for attempting to identify profitable trades, particularly in the effort to identify possible securities that would be worth deeper analysis using a more precise set of indicators and metrics.
The option class offers a broad look at the market’s expectations for the future of a security’s price that historical price charts cannot offer.
While some traders may prefer to ignore market sentiment and focus on trading a security’s fundamentals, day traders in particular are concerned with what other traders are thinking about a security’s future price path right now, as this often represents the greatest opportunities for making quick profitable trades.