I have received a lot of requests where you ask me to show how I analyse Daily Bulletin (DB), as very little information about this can be found on the Internet. So today we will continue our analysis of the futures on the Swiss franc that we began in the previous article, where we used the data provided in the COT report.
I would like to emphasise that I use the same sequence when analysing any market. First I work with the COT report where I find the markets with the emerging trend or at least that are ready to make a strong directional movement, based on the net open position of commercial participants. Only after that I look at the balance of the option levels with the maximum open interest using DB to determine the entry point with the least risk. As a result of this sequence, we can open a trade with a good potential movement and low risk.
Chicago Mercantile Exchange (CME) publishes Daily Bulletin (DB) every day except weekends and holidays. This is a report of changes in open interest on the futures and futures options, which have occurred over the last trading session. In this report I only focus on open interest changes on the options, and everything that I describe below refers specifically to them. The put and call options data can be stored in one report, for example, Euro FX… PG 39, or they can be divided into two reports, for example, Swiss Franc… PG 35 and PG 36.
We see the day when these changes occurred at the top of the page. Below we can find the options start date 11/04 and the expiration date 12/09. It is worth mentioning that I analyse only American options. However, the report contains data on European options as well. It will always be marked as (EUR).
Note: starting December 2016 the period of American options will change to three months instead of one.
What information we receive
Below I’m looking for a section with the call options that expire in December 2016.
Here I start with finding the price levels (column 1) with the maximum accumulation of open interest (column 6), noting any significant growth of this value over the last trading session (column 7). If there is any, I allocate a strike (price level), which clearly indicates these changes. If this price level is of interest to me, I will indicate the premium that traders have paid at the end of the day (column 3) on this strike. The premium is always displayed in points and can be useful if we want to determine the area of price reversal more accurately.
I have also noted the columns, which may be of interest to you. Column 2- the premium which was at the end of the day preceding the reporting one. Column 4 shows the difference between columns 2 and 3. Column 5 reflects traded volume on strikes.
Then I’m looking for a section with the put options that expire in December as well. In the case of the Swiss franc I have to open another report for this. I can see what changes have occurred here.
What conclusions we can draw
According to the analysis of two reports, we see that the maximum concentration of call options – 470 contracts – is at the strike 1.050. The maximum open interest accumulation of put options – 371 contracts – is at the strike – 1.000. We have not seen a significant increase in open interest at any level. The picture below shows the distribution of open interest at the strike as a histogram.
We see that at the moment the price has fallen far down relative to the strike 1,000 and is within the buying zone. This information is interesting itself and can be used to find entry points into the market.
However, we will go further and try to determine the area of the pivot point more accurately. For this reason, I review DB on a daily basis, looking for a significant increase in open interest and detecting the premium, which was at the closing.
“A significant increase” is the different value of contracts for each market, which depends on the total open interest. In particular, it is 100 contracts and more for the Swiss franc.
I found the report in the history of the current option month, where such changes have occurred, to show you how this works.
As we can see, on November 14, in the put report was added 151 contracts at the strike 0.985. The premium at the end of the day was 38 points on this level.
Thus, we can assume that the one who has taken the liberty and sold this option will be in profit at the end of the option month if the futures price of the Swiss franc is above 0.9812 (0.985 — 0.0038 = 0.9812) for $ 1. Here’s how it looks on the chart.
Despite the fact that the chart looks beautiful at the moment and my credibility is growing in your eyes, I would ask you not to deceive ourselves regarding this tool. I haven’t seen the market levels that would not break, and this is no exception. However, I am sure that if you start using this tool in your trading, you will take profits more often. Just as I believe that after reading this material you have more questions than before.
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