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CM Strategy

Optionalysis: Retail Traders Short Options More than Any Other Market Participant, and Smart Money OI Sets Direction


Optionalysis Header


An interesting thing happened yesterday. On slack, Vashistha mentioned a very cool chart which showed open interest by type of investors. In a while, we wrote programs to download this data and tried to analyze it. The data comes to us, split in four participant types:

• Pro: Meaning, Proprietary trading, typically by brokers in their prop portfolios.

• FII: is foreign institutional investors

• DII: Domestic Institutions like Mutual funds and insurers

• Client: Everyone else, meaning: retail.

And then we get data which is divided into open interest positions that are

• Long and Short

• Futures, Calls and Puts

• Index versus Stocks

So we can say that FIIs had X amount of contracts of open interest in Long Futures on Indexes. Or that Retail has Y open interest in Short Call Options. We take that data and splice it up in two ways.

“Smart Money” Versus Retail: Who’s Where?

Now, a “long” position is either

• a Long Future

• a Long call option

• a Short Put option

The “short” position is the alternate of these three. If we add up these three, by type of investor, we can find total “long” positions of each type of investor, and total “short” position. Subtract the two and you’ll get the “Net Long” position of each type of investor. To normalize it, we find the net position as a percentage of the total open interest in the market.

Here’s the “Net Long” position by type:

Smart Money

As markets seem to go up, retail Net Long OI as a percentage seems to be trending down – in negative territory Retail is Net Short.

And the graph shows us a few things:

• As Retail goes short (blue line dips downwards) and Pro+FII tends to go long, this is a sign that markets are going upward. It’s likely here that retail is booking profits just as fresh positions come in from the institutions.

• In general Retail behaves the exact opposite of the institutions. And the Pro+FII pair is usually the direction of the market.

• Currently, we are not at an extreme in terms of Pro+FII bullishness (just 5% net) and not at an extreme in bearishness of retail but getting there soon. The extremes are around -10% or -15% in either direction.

Prop versus FII: Divergences are Vague, But Moves Together Set Market Pace

Looking at the same chart with only Prop and FII net longs, here’s the status:

FII versus Pro

While there’s no easy strategy to use, the big thing to note is:

• When they are both moving in the same direction, the index moves are the strongest

• When they diverge (one moves in one direction whereas the other goes the opposite way) you find that markets flatten out completely.

At this point, both seem to be heavily oriented to the long side.

Who’s Shorting Options? Retail!

This is a shocker. You would think the people who short options more are the “smart” people. Turns out that much more of the open interest on the short options side is with retail! In fact,retail short options (puts + calls) account for more than 50% of the open interest of all the option positions in the market.


This statistic might be scary but remember that the situation has seen one big downturn (2013) and a massive upmove (2014-15) and they haven’t been shaken off.

Our Views

While it looks like the retail positions are totally clueless, it’s quite likely they are being very smart. Their long positions increase as the market falls (where they build up position) and then they sell when the market recovers, reducing their position and booking out their profits.

Retail is also the biggest option short position in India, which is very different from abroad.

In general, these positions don’t provide a trading direction, but we think there will be cues at extremes. When retail is at +15% or -10% you want to be careful for a reversal of the trend.

Currently, there isn’t such an indication (yet). However we’ll track this, and we’ll try and bring this to you through Snap. ( is our proprietary data portal).



Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion. 

Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.

Capital Mind for ZD



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