Options Flow Tools Manual

Options Flow liquidity/volatility analysis
Here you will find rough explanation of options flow tool, its elements and usage based on my present findings and understanding. All the metrics are changing only during regular trading hours. The levels on the other hand, clearly impact the market in overnight session.

Key Levels:

vcall/vput – most important levels to track during the session. These levels are the estimation of market maker`s liquidity book normal volatility range. What that means is vcall/vput shows the range inside of which market maker makes money (mms profit from market staying in a range, not from betting on direction – in general). Deviations above or below these levels will force market maker to significantly readjust their positions (hedging). These levels will significantly change after monday, wednsday and friday session and naturally everyday at market open. vcall/vput levels are calculated based on the options real-time transaction flow, filtering bid/ask trades and large block transactions.
Major phenomena observed with these two levels: RTH open is always (so far) between cvol/pvol range which makes it attractive to fade any overnight deviations above vcall or below vput. 

ocall/oput – same as above but calculated based on open interest of considered strikes. These levels are usually too far for price to reach but when it occasionally hits ocall/oput its a very strong and precise market turning point. 
cvol2/pvol2 – same as vcall/vput but calculated without present expiration data. These levels mark potential deviation from normal vcall/vput range.
cdev/csl and pdev/psl – artificially calculated levels of normal and max deviations from cvol/pvol. As far as cvol2/pvol2 are max deviations based on data, cdev/csl and pdev/psl are calculated using present volatility. csl/psl can be used for example to determine max stop loss levels for a position (cvol2/pvol2 can also be used for more agressive risk control as price very rarely moves beyond these).

Liquidity/Volatility metrics.
high/low thresholds – there are three levels of liquidity/volatility divided by high/low thresholds. Above high threshold is high volatility environment, between high and low there is normal or mean reversion volatility, below low threshold is low volatility environment.
– liquidity of options market expressed in volatility terms (low volatility is bullish, mid volatility is mean reverting market, high vol. is bearish).
nL/nS – liquidity of SPY expressed in volatility terms (same as dv).
(ignore purple line)

Liquidity/Volatility patterns – below I will discuss few repeating patterns observed on spy/spy options liquidity surface which will serve as a framework of a strategy around this concept. One importat thing to note is volatility pattern is established early in the RTH session (first 10-20 minutes) and rarely will be changed in later part of the day. Also its important to disregard first 2-3 minutes and also last 5-10 minutes of session.

Normal SPY and Options volatility which is bullish and trading long from vcall is ok.

Later in the day turned to high vol on SPY which is bearish while options vol stays normal.

High Spy volatility and low Options volatility is a bullish pattern but it is very important to understand that before actual upmove happens there will be “long-squeeze” and highly possible vput breach so the price will break-out below vput level which will present great bullish opportunity. But, as stated above, first expect move towards vput.


Normal volatility on both SPY and options is generally sideway/bullish, vcall/vput should not be breached.


High vol. on SPY and options is bearish but it is very important to note it is usually possible for the market to short-squeeze and breach vcall before the drop. In this example there was ocall level which is very strong resistance and market turned down exactly on that number. 


In summary:
High vol. SPY + High vol. Opt. = bearish but expect move up first (short-squeeze) even beyond cvol, many times move down will come during overnight after one way action during rth.

High vol. SPY + Normal vol. Opt. = bearish

Normal vol. SPY + Normal vol. Opt = sideway/bullish

High vol. SPY + Low vol. Opt = bullish but expect long squeeze and move below vput before up-move. 

Normal vol. SPY + Low vol. Opt = bullish