In our previous Marketshala series blog, we had discussed Quick Guide to know Option Buyer or Seller in which we had discussed how to identify option buyer or seller by analyzing the option chain.
In another interesting session as part of the highly popular MarketShala series conducted by Elearnmarkets, Mr Vivek Bajaj, Co-founder Elearnmarkets, and Mr. Chetan Panchamia a prolific intraday trader and trainer with many years of experience came together to decode how to become an expert in option chain analysis.
Here is a short discussion of this session. If you want to get a practical understanding of how to become an expert in option chain analysis, watch the full video at the end of this blog.
Before we get into how to analyze option chain traders need to follow certain steps:
- Firstly, traders should understand Price Action I.e. whether the market is in the trading range or giving breakout in the up or down direction.
- Secondly, if the stock is in the cash market, then one needs to check whether the volume and delivery are moving up when the stock’s prices are going up or down.
- If you are trading in the futures then how much is the open interest of the stock or index as compared to the average open interest.
- Fourthly comes the part of the option chain study in which one should analyze whether option writing is happening in which call or put strike price. Whether the call writing is happening more or the put writing.
- Finally, when we bring together all the above four steps we get the market breadth analysis and the get the holistic picture of what is happening in the market.
One should note that in India European options are traded which are exercised on the expiry, unlike the American options. So the options traders should look at the option chain from the seller’s perspective.
What is Option Chain?
The option chain is a matrix where we analyze in which call or put strike price trading is happening, open interest, premium, and average prices of the particular instrument of the particular series is shown in one page.
How to analyze Option Chain?
Whenever you want to see the option chain of a particular instrument you need to go to the NSE website.
Let us take an example:
Then in the “Lives Market” tab go to “Option Chain” and then “Equity Derivatives” you will get the option chain of the Nifty.
If you want to get the option chain of any stock you can write the name of the stock in the tab and click on Go.
We can see the expiry series; one should note that weekly and monthly expiries are available for Nifty and Bank Nifty.
When we come below we can see on the table are Call and Put written.
The buyer of the call has the right but does not have the obligation to buy the contract. If the price goes above the strike price then the buyer of the call will profit. If the price goes below the strike price then the loss will equal the premium paid.
Similarly, Puts are the right to sell an asset but do not have obligation to do so at a particular strike price. If the price goes below the strike price then the buyer of the put will profit. If the price goes above the strike price then the loss will equal the premium paid.
Then we can see the open interest, volume, LTP and strike price of both call and put optons which are important parameters to depict the option chain.
How to make a view for any underlying asset using the option chain?
From all the data, the open interest is the most important column in the options chain as we need to analyze it from the seller’s perspective.
Open Interest means the number of contracts that are open for trading.
One should notice the strike price in which the open interest is maximum.
We can see from the above screen that at the strike price of 11,300 the open interest is maximum.
As we can see that the change in the open interest is negative, we can determine that the option buyer is incurring loss at that strike price and the options seller is making a profit.
We need to see the average price, so we click on the LTP.
We can see at the average price i.e. VWAP OF Rs. 25 which means that till this price the options sellers were aggressively selling.
So we can say that 11325, i.e. strike price+ VWAP will be the strong resistance.
Now let us go to the daily chart of Nifty, from where we can see that 11,300 is an important low psychological level.
We can also see that the market broke the level of 11,300 to the downside and call writers became aggressive.
Now at the same strike price, we need to see what put writers are doing are they supporting 11,300 or not.
For this, we can go back to the option chain and see that at the same strike price the put writers had cut their position.
Now let us go to the 15 minutes chart of Nifty to determine when the put writers cut their position.
We can see at the beginning of the trading session only, prices fell and broke the 11,300 level, the buying again came but wasn’t able to cross that price.
So the level 11,325 is an important level for the call writers for tomorrow’s expiry.
If the market does not sustain above 11, 325 then there will be more of bears’ grip.
You can also read more articles on StockEdge Blog
You can watch the full video from here:
So we can conclude that if we combine the chart with the option chain study then we can get a different level of conviction.