Option Payouts Function and Lowest Payout Levels

Payouts function

The payouts function (blue curve) reflects, depending on the slope, where the option payouts will be greater. The X scale is the futures price, the Y scale is the amount of payments that must be paid to the option sellers if the expiration date is today.

If the right side of the chart is raised higher, it means bigger payouts will be upper, if the left side is higher, then the payouts are greater if the futures price fall.

At the price point, where the curve is closest to the X scale, the payouts are the smallest. As this point is very important for us, we display it on the chart as a level. Thus, we understand in which direction the price movement is more profitable for option sellers (MAX PAIN for option buyers), and where they will suffer the maximum losses.

Option payout levels

Option payout levels, which is a key element of the payout feature in the TVT platform.
They are activated in the menu "Indicators - Option payouts"

Exactly these levels work like a magnet to this area at least once until the expiration date. This is because options sellers, who are often large players or Market Makers, do not benefit from leaving prices where the majority of the options volume will be in the money. They are interested in bringing the price closer to the level of their maximum profitability, so this area often pulls the prices.

Also, we use option payout levels (OPL) as resistance zones. If HFT volumes appear on the OPL, this may mean that the large option sellers made a hedge (have neutralized the delta on the options with the help of futures). And the one who took this volume (Market Maker) will be interested in the price movement in the opposite direction (to close the position in profit).

This option feature work on all liquid instruments such as S&P500, Euro, Gold, Oil, Pound, Yen, as well as less liquid instruments such as Silver, Copper, and Natural Gas.