How Options Affect the Futures Market

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Hi everyone, I'm Fabio, founder of Mentor Cube. I started my career at Bloomberg working with top financial institutions in London and New York. That's where I saw how powerful data can be. Later, I led a team at a startup selling alternative data to large institutions and hedge funds and realized how fast finance was changing. Today, data is everywhere, but for traders, making sense of it is a real challenge.

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During COVID I saw a big gap. Retail traders do not have access to the same kind of tools that institutions use. That's why we started Mentor Queue. We build quantum models and data tools to help traders every day with one clear goal. Use the data the way the pros do.

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Make complex data simple and turn it into clear, actionable signals to trade better and manage risk smarter. In today's video, we're going to discuss the importance of options on futures market. Understanding their importance is key for any futures traders looking to develop a long term strategy. Options data gives futures traders an edge by revealing what the smart money is doing. Options levels allow us to spot market moves early, identify key price levels that can act as support and resistance, and managing risk more effectively by understanding market sentiment and where large players are positioning.

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If you are only watching future charts without paying attention to what's happening in the option market, you are trading blind. Why? Because option flows often create future flows. Market makers hedge large options positions by buying or selling futures. This activity, driven by shift in gamma exposure or large open interest at specific strikes, can cause price moves that seem random on a chart but are perfectly logical when viewed through the lens of options.

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Once you see how option flows move, the market support and resistance won't look random anymore. They will look like deliberate levels shaped by big players and institutional flow. Take a look at this chart. It shows how option volume has grown over the past 25 years. In 2021, for the first time ever, option volume surpassed equity volume and is still growing.

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Options are no longer a side market. They are a major force behind price action. If you understand option flow, you'll be able to manage risk better and trade with more confidence. This is why option data isn't just a nice to have. It's essential.

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It lets you anticipate movement, not just react to it. Let's now analyze why option data is so important and let's start by taking a closer look at implied volatility, often referred to as iv. This is one of the most important factors the option market provides and is critical input for any trader focused on managing risk and anticipating market movement. Implied volatility reflects the market expectations for future price movement, not the direction, but the magnitude. When implied volatility increases, it suggests the market is pricing in greater uncertainty or potential for large moves.

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This typically happens ahead of major events like earnings, economic data or geopolitical developments. On the other hand, when implied volatility decreases, the market is signaling stability or reduced uncertainty, often pointing to a lower expected volatility and potential for more range bound price action. This is very important for future traders because changes in implied volatility often lead to price action, not the other way around. Think of it this way. A spike in IV can precede breakouts or trend acceleration.

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A drop in IV can signal consolidation or a lower volatility regime. What makes implied volatility so powerful is that it offers a real time view of market sentiment based on where capital is flowing. In the option market, this makes it an excellent early signal for positioning, especially in markets where option flows can heavily influence futures price movement. So before we look at prices on a future chart, it's important to ask, what is the implied volatility telling us about the expectations right now? Is the current level of IV high or low compared to the history?

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And how does IV today compare to realized historical volatility? Understanding this dynamic allows you to be proactive and not reactive and a key hedge in today's fast moving markets. So how can you use this as a futures trader? We can use it to spot big moves. Early.

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Rising IV means that the market expects something big. This helps you get in position before the move happens. Implied volatility can also help us manage risk. High IV equals more risk. Low IV equals calmer market.

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We should use this to adjust our position, size and strategy. And finally, it allows us to understand market sentiment. Implied volatility shows whether traders are nervous or confident. So you are not just guessing sentiment from the chart. Now let's look at delta hedging.

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This is where option theory turns into real world price movement, especially in the futures market. To understand the importance of delta hedging, we need to understand how the option market works and the importance of market makers or dealers. Market makers are firms that provide liquidity by continuously offering to buy or sell securities, including options. They are not trying to predict direction. They are trying to facilitate trades and profit from the spread, the difference between the bid and ask price.

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By providing liquidity, they take on a risk. And that is why delta hedging is key. Because they don't want risk, market makers hedge their positions, often using futures. This hedging activity can create real buying or selling pressure in the underlying market. Especially when there's a lot of option volume.

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When large options positions are traded, especially at the money, options dealers and market makers often need to hedge their exposure. They don't want directional risk, so they often use futures contract to stay delta neutral. Here is how delta hedging works and what happens. If a trader buys a large number of calls, the dealer or market maker who sold those calls is now short delta. So to hedge, the dealer or market maker has to buy future or the underlying asset.

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If the market rises and those calls move deeper into the money, the market maker needs to buy more futures or underlying to stay delta hedged. On the other hand, if a trader buys a large number of puts, the market maker who sold those puts is now a long delta. To hedge the exposure, the market maker needs to sell the underlying or futures. If the market drops and those puts move deeper into the money, the market maker needs to sell even more assets or futures to stay delta hedged. Now here is where it becomes more intense.

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As we get closer to expiration, delta becomes more sensitive, so hedging becomes more aggressive. With zero DTE's options which are zero days to expiration, this happens faster and with more force. And even small price moves can trigger large rapid future selling. This dealer driven hedging can amplify downside moves, especially near key strikes with eye open interest and gamma. So knowing about delta hedging is very important for futures traders because it explains how option activity can create a real buying or selling pressures in futures.

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Helping you understand price moves that aren't visible on the chart alone. We can better understand why the market moves. Prices can move fast because of dealer hedging, not news. So knowing this gives you better insights. Another reason why options data is so important is because it can help us spot key price levels.

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Big options positions means dealer hedge around certain strikes. And this can act as support and resistance. And understanding how the market moves helps us avoid chasing bad trades. Because not every big move is actually a real buying or selling. Some big moves are purely driven by hedging.

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You have probably seen this before where price moves up or down and they stall right near a round number. Ever wonder why this is not magic? It's options positioning. In the options market, volume and open interest tend to cluster around keystroke prices, often around numbers like 4000, 4200, 4500 in the SPX for example. And these strike prices attract most attention from traders and market makers.

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Here is where it gets very interesting. Market makers who sold options at those strikes need to hedge their Exposure, often using futures. And as price get close to those levels, they buy or sell futures to stay delta hedged. At the same time, speculative traders are watching those same strikes, adding even more flow. This creates a magnetic effect.

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Price is naturally pulled towards high open interest strikes, especially as expiration approaches. So for futures traders, these strike prices act as hidden support or resistance zones. They might not show up on a technical chart, but they are absolutely real in terms of flow and reaction. Understanding where these levels are can help you anticipate reversal, break breakouts instead of being surprised by them. So now that we understand why strike levels matter, let's talk about how to spot them using actual data.

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In the option markets, there are two key factors that we need to watch. Volume, which is how many contracts are being traded today, and open interest, which is how many contracts are still open or not closed or expired. When you see high open interest at a strike, that tells you a lot of traders have positions sitting there. If you add in rising volume at the same strike, then you know that the strike is active and important. Right now, these levels become real world support and resistance, not because of chart patterns, but because how dealers and large traders are managing risk and positioning.

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But to truly understand how these levels impact price movement, we need to go a level deeper into something called gamma. This is where gamma exposure comes in. Gamma measures how much of an option delta changes as the price of the underlying moves. But why does it matter? Because market makers and dealers are constantly hedging their delta exposure, usually by buying or selling futures.

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So when gamma is high, the delta of their positions changes quickly with every move in the market. When large amount of options are sitting at certain strikes, market makers are often on the other side of those trades. And to manage risk, they have to buy or sell futures dynamically, depending on how the price moves. This hedging activity is what causes price to accelerate or stall around certain price levels. It's not just where the option sits, it's how those options impact dealer behavior.

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So yes, we need to watch volume and open interest levels. But if you want to create an edge to your strategy, it is key to track where dealers are short or long. Gamma, that's where the most powerful flows often come from. So to recap, open interest and volume tells you where positions are. Gamma tells you how those positions can move the market.

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We will talk about gamma levels in a separate video. The next key concept is understanding option expirations and how the price tends to pin as we approach the expiration option. Expiration week or OPEX is the Date when option contract expire, Usually the third Friday of each month for monthly option, but though there are also weekly and even daily options, or zero dtes, which is zero days to expirations. As we get closer to options expirations, especially weekly or monthly expiry, something interesting happens. Price starts to pin near certain strike levels.

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But why? Because that's where there's often the highest open interest and both dealers and traders are adjusting or closing positions. Market makers wants to stay delta hedged and traders want to manage risk or lock in profits. This war around high interest strikes can keep price stuck near a level even when momentum suggests otherwise. What you'll notice is that volatility drops, price moves tighten and futures often hover right near those big strike numbers.

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This spinning effect can last right until expiration. Then once the options are gone, the pressure is released and you can get sharp moves as the market unwinds. So if you are trading futures near expirations, especially on a Friday, know where the big strikes are. They might act as magnets or ceilings, not because of news, but because the option market is holding price there. So in short, OPEX acts like a reset button.

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It can compress price into a narrow range beforehand and then open the door for a new trend or volatility after. If you are a futures trader, knowing where the big options are expiring can help you anticipate price behavior, not just react to it. So we have a few possible scenarios as we approach opex. The first scenario is where market makers unwind their hedges. Throughout the life of an option, the market makers are actively delta hedging, buying or selling futures to stay neutral and as the price moves.

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But once those options expire, there's nothing left to hedge. The position disappears and so does the need to hedge. That means that market makers may reverse or unwind those futures positions, leading to sharp price movements in either direction. Especially if a lot of gamma was in play. Many times we see a technical breakout and we ask ourselves what caused that?

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There was no news. But the answer is often found in the mechanics of the option market, not the headlines. What looks like a random move on the chart is often just a large hedging flow and winding. Understanding this gives you a real hedge because you are no longer reacting to price, you are reading the structure behind it. Another possible outcome of OPEX is gamma squeeze or strong technical move.

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Option expiration isn't just the end of a contract. It can be the start of big price moves in the future market as we approach expirations, especially when There's a high gamma exposure. Market often become pinned near key strikes. This is where we see gamma squeezes. If a price starts to move through a high gamma area near expirations, market makers may buy into rising prices or sell into falling prices, accelerating the move.

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Once options expire, the need to hedge vanishes and those future positions are reversed. With the pressure gone, price often snaps back or finally breaks out of tight ranges. Many traders are confused by these moves. They look technical, but they are flow driven. Knowing where gamma is concentrated before expiration can help you anticipate where future might move fast or reverse hard.

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Another potential outcome is the rolling of positions. Large funds and institutions often don't let option position expire. They roll them into the next expiration. This involves closing current month's options and opening new ones in future expirations. And this can shift market makers hedging flows to new strikes and expirations.

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This can also create temporary imbalances in futures as those trades are executed. Influence the term structure and short term volatility. When big players roll their positions, dealers must adjust their hedges, often buying or selling futures at scale. This can cause temporary dislocation in prices and moves seem random unless you know what's happening. It can also reshape the term structure which impacts volatility and momentum expectations in the short term.

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So understanding all of this can help future traders anticipate where new support and resistance zones may emerge based on where the new option exposure is concentrated. It can also prepare for volatility spikes or compression around roll dates. And finally adjust short term strategy where you know a larger order could create hedging driven flows. So now let's look at how you can read this within the data. As a futures trader, you should always look for sudden spikes in volume and open interest in the next expiration cycle.

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Always look for drops in open interest for near term options. This is normally a sign that positions are being closed. And finally look at shifts in gamma and delta exposure are new strikes. Which tells us where dealers may now be. Hedging tools like gamma Exposure or jax.

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Open interest change and term structure chart can help you track this flow and adjust your future bias by using a data driven approach. The more you understand where the positioning is moving, the more you clearly you see what's driving future price action. We then need to understand the importance of the term structure. It's very important to understand how rolling options position reshape volatility and future curves. Every month, institutions and funds roll large options positions, especially in indices and commodities.

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These roll Flows have a powerful impact on the term structure of volatility and can even influence future pricing. Here is how. When positions are rolled forward, volume and open interest shift to longer dated expirations. Market makers adjust their hedging across the curve which can push future prices in the short term. When implied volatility is higher in near term expiries, traders may look to sell front month and buy in longer dated options.

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When longer dated volatility is cheaper, it may create a favorable environment for long volatility structures or calendar spreads. As a futures trader, understanding how option term structure shifts during rolls helps you time trades around volatility, compression spikes or curve changes. Let's wrap it up with one of the most accessible but most insightful tools coming from the option data, the put call ratio. This ratio tells us how many puts are being traded relative to calls and it's often used to understand sentiment and risk appetite in the market. A high put call ratio greater than 1 means traders are buying more puts than calls.

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Typically is a sign of a fear or hedging. A low put call ratio less than 1 suggests bullish sentiment or excessive risk taking. But here is where it gets useful. These extremes can be contrarian signals. A very high put call ratio often appears right before a bounce.

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A very low put call ratio can precede pullbacks or volatility spikes. Combine this with gamma positioning and you get a complete view of both sentiment and flop, two sides of the same coin. As a futures trader, you can use the put call ratio daily to help you confirm the strength of a trend spot turning points and avoid being on the wrong side of positioning. So now let's quickly recap what we covered. You learned how option flow impact future market from delta hedging and gamma exposure to strike level magnets and expiration effects, we explored how to use implied volatility, open interest and put correlations to read market sentiment and anticipate price action.

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And we walked through how expirations and rolling flows create pressure reversal and opportunities that many traders miss. When I first started watching the option market, it completely changed the way I approach futures. I stopped asking why did the price move like that and started seeing where the flow was coming from. This shift helped me become more strategic, more risk aware and more consistent in my trading. Understanding option mechanics, especially market makers behavior and hedging flows, gave me a context that I never got from a chart alone.

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And that mindset shift made me more consistent. I wasn't reacting to charts, I was reading the mechanics behind the moves. That's exactly why we built Mentor Q to empower traders with the same tools and data that institutions use. We believe retail traders deserve the same edge as the pros, and we build Mentor Queue to deliver it. Thank you for spending time with me, and I hope this session gave you fresh perspective and tools you can immediately apply in your own trading process.

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Be sure to check out all the other great videos available and keep learning how to trade the data, not the noise. If you want to learn more about our approach and models, follow [email protected] Sat.