Contents
Below mentioned is a part of the screenshot of the option chain. At the top center of the page where there is the search box, type Nifty. Once the drop down list of items appears, select Nifty, as shown in the screenshot below. The author of this book is Balkrishna M Sadekar, https://1investing.in/ it has both Kindle and paperback editions. In this book, the author explained how to generate regular income through non-directional trading using options. The third part covers Python for traders where you will be able to code your own strategy and do backtesting.
- It is worth mentioning that most of the volume and OI activity tends to take place at strikes that are round numbers.
- The LTP displays the Last Traded Price (i.e. the option premium)of the Call and the Put option for each strike price.
- Continuing with our discussion, when looking at an option chain, such as the one shown in the image above, look at where most of the open interest positioning is.
- It talks to readers about numerous trading decisions and how to resolve critical decisions.
- When looking at the Option Chain, think from the writer’s perspective and not from the holder’s perspective.
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Basics of Finance market and options analysis Step by Step by Gaurav Sir
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Instead, as the underlying price changes, the colour of the option chain can also change when a few options move ITM while a few others move OTM. NSE option chain displays “Open Interest”, “Change in OI”, “Volume”, “Implied Volatility ”, for all strike price for a particular underlying stock. The tool also provides the functionality to see the trend of how these values have changed over the month.
However, Option Chain analysis can also be applied to stocks, especially the top stocks that are a constituent of the Nifty index. Let us take the example of Reliance Industries Ltd, which is India’s largest company by market capitalization. The Ask Price tab displays the price that sellers are willing to accept to sell the option of a particular strike price.
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Trading an asset that is not liquid is risky because of various factors such as choppy price movements, high transaction costs, difficulty in entering and existing trades at the desired price and time, etc. There are a few ways to check for liquidity and one of them is to look at the volume and open interest statistics of an option contract. Well, volume and open interest are two different concepts, yet are very closely related to each other. Let us now see what these two variables represent and why it is so crucial to understand them as well as to monitor them when entering an option trade and after having entered an option trade.
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The Bid Price tab displays the price that buyers are willing to pay to buy the option of a particular strike price. Let us change the expiry date from the weekly expiry to the monthly expiry. Now the Nifty option chain having the monthly expiration will appear on the screen.
This essentially tells how volatile the respective option contract is. As a rule, the higher the IV, the more volatile is the option price for a given change in the underlying price, and vice versa. Let’s walk through Top-6 books on options trading to explore the basics of options trading, options trading strategies, and techniques to deploy in 2021 markets. It can also be seen that for all the OTM Put strikes with the exception of 1440 and 1460 as well as for all of the ITM Put strikes, the decline in Put premium has been accompanied by a fall in OI. This indicates at long liquidation and closing of bearish positions. On the Call side, the rise in premiums of ITM Calls accompanied by a corresponding fall in OI indicates at short unwinding by Call writers.
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Again, remember that OI is an aggregated figure , whereas volume is a figure for that day only. If OI and Call premium both are rising, it generally means calls are being bought. Will read again and again, definitely will gain some knowledge.
Cons of options trading are
A negative value means that the price has declined from the previous day, while a positive value means that the price has advanced from the previous day. The team at NiftyTrader.in is always endeavoring to improve education about technical analysis approach to decipher the movement of stock market. The book is a perfect pick for someone who desires to explore the world of options trading. The author explains how options trading is an art and lists various techniques which allow one to master this art to make huge gains. It gives insight into how the theories are applied to the practical models of pricing techniques.
For our discussion henceforth in this chapter, keep in mind that when we talk about volume and open interest, we are talking about them for option contracts only. On the Call side, we can see that an increase in Option price has been accompanied by a decrease in OI, which is indicative of short unwinding by traders who had written Calls previously. On the Put side, notice that the decrease in Option price has been accompanied by an increase in OI, meaning fresh shorts are being written. Fresh Put writing between strikes 4500 and 4800 suggests that this region could act as strong support zone going forward. Having said that, short unwinding of Calls between 4500 and 4800 suggests that the underlying could break above the upper end of this range. The IV tab displays the Implied Volatility for each strike price and for each of the option type.
Instead, it must be used to compliment the other forms of analysis, especially when building positions in options. Taking trading decisions just based on observations made fromthe Option Chain data can be quite risky. For short-term trading, one can complement Option Chain analysis and Technical analysis to make informed trading decisions. Volume and open interest tell a lot about the market sentiment, in terms of the positioning of buyers and more importantly that of sellers.Notice here the usage of the word ‘importantly’. Thereason why I have used this is because option writing (i.e. selling) not only requires more margin, but it is also much riskier. Hence, it is usually done by professional traders and large market participants such as FIIs and funds.
Option Chain Analysis
So, from a very short-term perspective , a higher number of OTM Call writing and OTM Put addition indicates at a bearish setup. Short unwinding of NTM Put strikes also indicates that bullish positions are being closed out. So, as we can see, activity taking place in the Option Chain can often provide clues as to what might happen in the underlying instrument in the very short-term. Once the Indian markets open, one can wait for some time, say 15 minutes to half an hour, to allow the markets to stabilize and digest overnight developments. How the Option structure of the underlying develops during this period can often provide clues as to what lies ahead in the session ahead. This is an indication that the trend of the underlying is strengthening.
In option chain, the change in premiums are not matched with real time trading. When looking at the Option Chain, think from the writer’s perspective and not from the holder’s perspective. Continuing with our discussion, when looking at an option chain, such as the one shown in the image above, look at where most of the open interest positioning is.
In all, options trading is a bit different from equity trading and therefore one must step into it only after having useful and complete information. When you think to get into options trading then it becomes important to know how it works, and how to read the options chain. Options Greeks include the different parameters which affect the options premium.
This book starts with the basic concepts of options but slowly brings up all the topics of option chains. Many options traders deploy only non-directional trading strategies, and they rely upon firefighting techniques to manage their positions if something goes wrong. This book starts with an overview of definitions and what types of options (calls/puts) are suitable for various kinds of traders. But it stands out with a detailed explanation of each strategy and which kind of trader should consider any strategy. Most of the traders would be actively trading in options, but very few make use of the NSE option chain data. Keep in mind that the colour of the option chain does not remain fixed.