The Center of Mass report is designed to highlight stocks that have bearish or bullish signals based on options traded during the trading day. It is part of the unusual options volume 'family' and the Open interests ('Max Pain') 'family.'
What is 'Center of Mass'
The 'Center of Mass' indicator is based on an article from the University of Miami Business School by Gennaro Bernile, Fei Gao, and Jiangeng Hu. See the article here.
The indicator aggregates the entire option volume for each stock while considering their strikes to discover the options' 'center of mass': Where most market participants trade the options.
The CoM presented as a price that we can compare to the current stock price. In the research, the authors show that the CoM has short-term alpha when predicting the stock's future move (in the next four days).
What is the Edge
The authors calculated the CoM of all stocks and sorted them according to the distance from the current stock price. They then divided the entire universe into ten groups, with 10% of the stocks in each group. Next, they've built a long-short portfolio where they bought the top 10% and shorted the bottom 10% of the stocks. Their analysis shows an alpha up to 5 days after the signal. See chart:
How to use the report:
This report highlights stocks to notice and analyze and trade. We highlight the top 3 stocks with the highest distance between the CoM (bullish signal) and current market price and the bottom 3 stocks (bearish signal).
Similar to unusual options activity analysis: You should NOT trade the stocks as is, but analyze them and use confirming signals to enter trades based on these signals (due to noise).
We plan to add a blog post with an example in the coming weeks. Stay tuned (UPDATE: We've added the blog post. Read here: How to use the Options’ Center of Mass report to sharpen your trading edge ).
Delivery of the report:
This report is sent to your email automatically. To control the email frequency, use: Settings -> Reports tab.
Sending Frequency:
- Never
- Weekly - The report Will be sent over the weekend, after Friday's close and the EOD calculations.
- End of Day - The report will be sent every day after the EOD calculation process. It will arrive before the next day's session.
- Intra-day - The report will be sent about 1.5 hours to close every day. It will use the intraday data, so it will not have the complete picture (as trading still goes on), but it will be possible to trade in the same trading session.
Scanned universe
Sample report
How to read the report:
Center of Mass- This is where the options' Center of Mass, when calculating it based on options traded and their deltas. The number is the price, and the percentage is the distance from the current stock price. The higher the number, the more bullish the signal (reverse for bearish).
Calls, Puts Volume - The total calls or puts traded across the entire chain and expiration.
CoM Trend - The trend of the Center of Mass over the last five trading days. If the CoM went higher, it would be green, and it will be red if it went lower when compared to the previous day value.
Volume by Stike - Histogram chart where the X-axis are the strikes, The blue bars are the options volume, the black line is the stock price, and the dashed line is the CoM.
Permissions:
- Trial users can get any report for the two-week free trial (no credit card is needed).
- Advance plan - Annual users, can use intraday reports.
- Beginner plan - Annual users, can use the EOD reports.
- Legacy plan (premium users from before Nov 2021) - Can use End of Day reports.
- Monthly plans - Please upgrade your plan to access this feature.
FROGED