Open interest is the glue that holds a market together.
When an index trades in the same area for weeks, contracts pile up at those strikes and never get closed. That accumulation builds into an enormous ball of risk sitting under the market.
It is the reason most days feel orderly.
Dealers holding the other side of all those contracts have obligations. They hedge as price approaches a strike and unwind as it moves away, and that mechanical activity anchors the tape whether anyone notices or not.
Roll your chart back into any area where the market spent real time and you will find a proverbial crap load of open interest sitting there. Trade in that neighborhood is solid, more predictable, and it behaves the way you expect a market to behave.
Now take the glue away
This week the S&P 500 blew through its weekly expected move and kept going into territory it had never occupied.
Pull up the option chain up there and it looks normal at a glance. There is open interest. But it is nothing in comparison to the beast that lives down below, because all the serious size got left in the dust on the way up.
So there is no ball of risk. The risk just lives in the moment.
Hedging turns chaotic under those conditions. The second somebody trades, that is a hedge, and a single substantial order can shift order flow for the entire marketplace.
You go how can one trade do that, and the answer is that there is nothing else up there to absorb it.
I watched this from the other side
On the market-making side of the business, any time a stock or a major index broke to all-time highs, or into lows it had not seen in years, it turned into a complete mess.
It went up, then down, then down again, wild in both directions and impossible to lean on, because there was no accumulated positioning to slow anything down.
A market without its glue does that every single time price moves somewhere it has not been.
How to recognize it before it costs you
Two things tell you where you are.
The first is whether price has cleared the expected move by a wide margin. Once you are a couple of standard deviations outside it, you are usually somewhere the market has not built any positioning.
The second is volume. When the overnight session goes quiet and the biggest names have not traded a million shares in the pre-market, the entire world is holding back and waiting, which means nothing you see before the open means anything.
Put those together and you have a session you cannot handicap.
Do not try to predict it. Size for the fact that either direction can run a lot further than it should, and stop leaning on levels with nothing behind them.
A price with 40,000 contracts sitting on it is a wall, and a price with almost nothing there is just a number on a screen.
To your success,
Don Kaufman
P.S. You know what most traders do when the glue comes off?
They size the same. They lean on levels. They trust the move to behave.
And then one trade moves the whole tape and their account moves with it.
Before you place your next trade — especially when the market’s in new territory — run through the 60-Second Pre-Trade Checklist.
It’s the five checks I built to stop you from sizing into chaos like it’s a normal session.
Normally $29.97. Free today.
