We have heard a lot about option writer running for cover in various trades or option writer is trapped in some trade, but do we know what is the cost price at which option selling has taken place ?
A very simple question, do we know what is the average cost price of the option seller or option buyer in an option ?
We have one source from NSE which displays information related to OI, Change in OI, price, IV for all the strikes but we can not get the average cost price of the option seller or the average traded price of the option from the date it has started trading - Option chain link
Should we know about what is the cost of the option seller or buyer in any particular strike for a stock or Index ? Is this information important ?
We know that in options the probability of winning is with the option writer and we call them the smart money when they are winning, but we also call the option buyer as smart money when option buyer wins, in short 'Winner is the smart one'.
In Markets we can judge who is winning or losing only based on the entry / average price, so knowing the cost is important.
I have shared the concept of AVWAP in past in one of the session over this link
The concept of AVWAP is developed by Brian Shannon - twitter id @alphatrends
Building on the same logic, we can get the average price of an option seller / buyer for any strike by plotting AVWAP from the start point as the date from which the option has started trading. Lets call this as Life VWAP for an option
As an example - I have taken 12000 CE Oct monthly expiry. The option is trading at 159, while is Life VWAP is at 82. This indicates that option buyer is winning in this option till now.
Another example - I have taken 12000 PE Oct monthly expiry. The option is trading at 220, while is Life VWAP is at 379. This indicates that option writer is winning in this option till now.
What can be another implementation for this concept ?
We have observed that at some strikes in a Stock, we have the highest OI buildup and when the price hovers around that level, we are not sure if short covering will come or the price is going to take a resistance. This concept can help us make a judgement.
If Option price starts to trade above the Life VWAP for the option than the option writer may start to close the position, which will be reflected by reduction in OI of the strike and price moving up i.e short covering by option writer.
Example - SBI 200 CE OCT
Option chain for SBI 200 CE
SBI 200 CE OCT Life VWAP chart, when price crossed the Life VWAP, there was a short covering move in the option with price moving up and OI reduction.
To conclude we started with the question - How to judge if option seller is loosing ?