Basic Points

• DDOI (Dealer Directional Open Interest) means the hidden positioning of open interest (option positions which are currently open and not closed) between market makers (dealers) and their customers. 
• Each market maker will conceal this highly-guarded information pertaining to their own books (total portfolio positioning), but no market maker has this DDOI information globally for all books everywhere. Therefore, we can only estimate how dealers vs participants are positioned by the use of modeling and assumptions.

Intermediate: The Idea Behind the Model

DDOI information is neither public nor commercially available, and we can only estimate it with modeling. The reason why modeling DDOI is so important is because market makers reliably delta-hedge their own books every day, but market participants only delta-hedge sometimes. This asymmetry creates predictable market movements even if DDOI is only roughly estimated but mostly correct. 

At SpotGamma, the working assumption for the sake of our models is that dealers are short options for both puts and calls on equities. In a slightly different nature and explainable by the ubiquity of options strategies that short calls as part of an enhancement and a hedge to a long-only equity portfolio, namely option collars and covered calls, we model market makers to be short puts and long calls on index products. However, in the Equity Hub™, we model dealers to short both puts and calls because option collars and call writing are less common on individual stocks than they are on index products. 

The reason why this information is so important is because market makers will reliably delta-hedge (make trades usually in the form of shares to rebalance their directional risks back to neutral) their positions in mechanical ways, and this fact can be used to predict market movement if their positioning is known. This is why it is a priority for SpotGamma to be identifying dealer responses in the market each day–so that we can anticipate likely bullish and bearish flows in the market. 

For commodities, there is a hint at positioning with the way that commodities are broken down with CoT (Commitment of Traders), which will reveal aspects such as whether commercial or large or small speculators are buying or selling. CoT reports are released every Friday after the close, but this data lags three days back to Tuesday.