Using Open Interest as an Indicator

I thought it would be interesting to highlight an often overlooked indicator that can help determine  the probable direction of a Flag breakout.

Given the Bearish nature of the markets in the last few days, its not unreasonable to look for potential Short Candidates.

I've picked a bear flag that it forming to the downside.

We would put our automatic "Sell to Open" order a few cents below the bottom of the Flag and set our "Buy to Cover" stoploss somewhere above the flag as indicated in the figure below. I personally keep very tight stops, but this all depends on your risk appetite.

We also have supporting 'evidence' from the Options for this stock:

The Open Interest is the total number of contracts that have not been settled. If we specifically look at the February "At The Money" CALLS and PUTS it can be seen that there are more PUTS than CALLS 2122 vs 1699.

This tells us that there are more Options traders expecting this stock to go down than up.

You can find open interest for free at:


http://finance.yahoo.com/q/op?s=NTRI

Even if this particular example doesn't go down as expected, if you take this approach with all your trading then you will find that you will definitely make more than you lose.

*** TRADE WITH CAUTION ***
Remember - it is better to be outside a trade wishing you were in, than inside a trade wishing you were out.