The 16 Types of Options Trading
“In the Hindu epic Mahabharata, there are sixteen major battles known as “Mahadharas” that take place between the Kauravas and Pandavas, during which many important events occur, such as the death of major characters like Bhishma, Drona, and Karna..”
There are four main scenarios that can occur with respect to call options:
- Call Long Buildup
- Call Short Buildup
- Call Short Covering
- Call Long Covering
Similarly, there are four main scenarios that can occur with respect to put options:
- Put Long Buildup
- Put Short Buildup
- Put Short Covering
- Put Long Covering
When we combine the four scenarios of call options with the four scenarios of put options, we get a total of 16 possible combinations.
Short Covering Vs. Long Buildup
Now, Let’s talk about a crucial question – Which event is more bullish for call options trading – “short covering” or “long buildup”?
- Short covering and long buildup are both considered bullish events in options trading.
- Short covering refers to buying back previously sold short positions in anticipation of a potential increase in price.
- Long buildup refers to buying a large number of call options contracts, indicating a bullish sentiment and the expectation of an increase in price.
In terms of call options trading, “long buildup” is generally considered a more bullish event.
A long buildup occurs when traders are buying more call options contracts at higher strike prices, indicating their bullishness on the underlying asset. It involves buying actual call options contracts rather than just closing out a previously sold position.
The Open Interest Intensity Value (OII)
Let’s dive into the exciting world of Open Interest and develop a metric that can quantify our bullish and bearish sentiments. Let’s call it “Open Interest Intensity Value”.
- It reflects the intensity of the sentiment.
- The more positive the value, the more bullish it reflects.
- A higher absolute value indicates stronger sentiment.
|
Intent |
Call |
Put |
|
Long Buildup |
2 |
-2 |
|
Long Covering |
-1 |
1 |
|
Short Buildup |
-2 |
2 |
|
Short Covering |
1 |
-1 |
|
2 |
Bullish |
|
1 |
|
|
0 |
Neutral |
|
-1 |
|
|
-2 |
Bearish |
The above table summarizes it all. So,
- Call Long Buildup and Put Short Buildup reflect the same amount of bullishness.
- Call Short Buildup and Put Long Buildup reflect the same amount of bearishness.
Now, If we extend this theory to the rest of the 16 combinations and summarize them into a table –
Call Options | Put Options | Net Value | ||||
Intent | Bias | Value | Intent | Bias | Value | |
|
|
| ||||
Long Buildup | Bullish | 2 | Short Buildup | Bullish | 2 | 4 |
Long Buildup | Bullish | 2 | Short Covering | Bearish | -1 | 1 |
Long Buildup | Bullish | 2 | Long Buildup | Bearish | -2 | 0 |
Long Buildup | Bullish | 2 | Long Covering | Bearish | 1 | 3 |
Long Covering | Bearish | -1 | Short Buildup | Bullish | 2 | 1 |
Long Covering | Bearish | -1 | Short Covering | Bearish | -1 | -2 |
Long Covering | Bearish | -1 | Long Buildup | Bearish | -2 | -3 |
Long Covering | Bearish | -1 | Long Covering | Bearish | 1 | 0 |
Short Buildup | Bearish | -2 | Short Buildup | Bullish | 2 | 0 |
Short Buildup | Bearish | -2 | Short Covering | Bearish | -1 | -3 |
Short Buildup | Bearish | -2 | Long Buildup | Bearish | -2 | -4 |
Short Buildup | Bearish | -2 | Long Covering | Bearish | 1 | -1 |
Short Covering | Bullish | 1 | Short Buildup | Bullish | 2 | 3 |
Short Covering | Bullish | 1 | Short Covering | Bearish | -1 | 0 |
Short Covering | Bullish | 1 | Long Buildup | Bearish | -2 | -1 |
Short Covering | Bullish | 1 | Long Covering | Bearish | 1 | 2 |
For the different bias categories:
- Bullish: Indicates a positive sentiment towards the underlying asset.
- Bearish: Indicates a negative sentiment towards the underlying asset.
- Sideways with Neutral Intent: Indicates a neutral sentiment where there is no clear bias towards either bullish or bearish.
- Sideways with Bullish Intent: Indicates a neutral sentiment but with a high bias towards bullishness.
- Sideways with Bearish Intent: Indicates a neutral sentiment but with a high bias towards bearishness.
Now, We are putting the numbers -1, 1, 2, and -2 as just “Sideways”. As discussed earlier, The more positive the value, the more bullish it reflects.
Bias | Net Value |
Bullish | 4 |
Bearish | -4 |
Sideways with Neutral Intent | 0 |
Sideways with Bullish Intent | 3 |
Sideways with Bearish Intent | -3 |
Sideways | 1,-1,2,-2 |
Bias | Intent | |
4 | Bullish | Call Long Buildup + Put Short Buildup |
3 | Sideways with Bullish Intent | Call Long Buildup + Put Long Covering |
3 | Sideways with Bullish Intent | Call Short Covering + Put Short Buildup |
2 | Sideways | Call Short Covering + Put Long Covering |
1 | Sideways | Call Long Buildup + Put Short Covering |
1 | Sideways | Call Long Covering + Put Short Buildup |
0 | Sideways with Neutral Intent | Call Long Buildup + Put Long Buildup |
0 | Sideways with Neutral Intent | Call Long Covering + Put Long Covering |
0 | Sideways with Neutral Intent | Call Short Buildup + Put Short Buildup |
0 | Sideways with Neutral Intent | Call Short Covering + Put Short Covering |
-1 | Sideways | Call Short Buildup + Put Long Covering |
-1 | Sideways | Call Short Covering + Put Long Buildup |
-2 | Sideways | Call Long Covering + Put Short Covering |
-3 | Sideways with Bearish Intent | Call Long Covering + Put Long Buildup |
-3 | Sideways with Bearish Intent | Call Short Buildup + Put Short Covering |
-4 | Bearish | Call Short Buildup + Put Long Buildup |
Bhishma’s Resolve
Now, adding the Bias with the 16 combinations, I call the following Chart as Bhishma’s Resolve! Named after the mighty warrior Bhishma, who had to make difficult choices in the Mahabharata, this indicator reflects the level of uncertainty and ambiguity in the options market.
The interpretation of this data depends on the trader’s perspective and approach to trading.
There are many different ways to interpret the table in respect of options trading, and it ultimately depends on the trader’s perspective, approach, and the specific market conditions they are trading.
The 16 possible combinations of Put Open Interest and Call Open Interest can help traders in options trading by providing insight into market sentiment and potential price movements.
Price momentum: Changes in Put and Call Open Interest can also provide insight into price momentum. For example, if there is a significant increase in Call Open Interest accompanied by a decrease in Put Open Interest, it may indicate a strong upward price momentum. Traders may consider buying call options or entering long positions in the underlying asset.
In other words, imagine, Open Interest of an asset is turning from 0 to 1 to 2. It means, although it indicates Sideways, it is on an uptrend in terms of our theory.
As We have quantified it, the laws of Price Action apply here too.
When an asset turns from 2 to 1 after following a move of 0 to 1 to 2. We can call that “Mean Reversion”. These are just a few examples of how the combinations can be used in options trading.