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Open Interest Analysis

An option chain provides key option contract information like open interest (OI), volume, strikes and expiration dates. OI measures the total number of active option contracts and can indicate market sentiment and potential price movements. High OI at a strike price may signal support or resistance levels as option holders interests converge at that price. The put/call ratio compares put and call OI and can indicate oversold or overbought market conditions. Changes in the ratio may foreshadow shifts in market sentiment and trend.

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38 views

Open Interest Analysis

An option chain provides key option contract information like open interest (OI), volume, strikes and expiration dates. OI measures the total number of active option contracts and can indicate market sentiment and potential price movements. High OI at a strike price may signal support or resistance levels as option holders interests converge at that price. The put/call ratio compares put and call OI and can indicate oversold or overbought market conditions. Changes in the ratio may foreshadow shifts in market sentiment and trend.

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agt0062
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© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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OPEN INTEREST

ANALYSIS
What Is An Option Chain?
● An "option chain" is a comprehensive listing of available options
contracts for a specific underlying asset, such as a stock or an index.

● Key information that the Option Chain provides are Open Interest (OI),
Change in OI, Volume , Last Traded Price and Greeks. Additionally,
they show expiration dates, Implied Volatility, Strikes, etc.

● Traders and investors use Option Chains to analyze and compare


different options, enabling them to make informed decisions about
trading strategies, risk management, and market sentiment.
Nifty LTP

ITM OTM

OTM ITM
Strike
A "strike" refers to the specified price at which the holder of an option can buy or sell
the underlying asset

● At the Money
When the strike price of an option is approximately equal to the current market price
of the underlying asset.

● In the Money
For a Call Option, the strikes that are below the spot price are ITM.
For a Put Option the strikes that are above the spot price are ITM.

● Out of the Money


For a Call Option the strikes that are above the spot price are OTM.
For a Put Option the strikes that are below the spot price are OTM.
Open Interest (OI)
● It is the total number of contracts open in the market for a particular option.

● It is a measure of how many contracts are currently active and have not been
squared off.

● OI can provide valuable insights into market sentiment and potential price
movements.

● Change in OI tells us how much the OI has changed for a particular strike for the
day.

● It can also be the difference between the OI of a specific option contract on two
consecutive trading days.

● You can also analyse the point at which a rally might exhaust.
Open Interest vs Volume
While volume represents the number of contracts traded during a
specific time period, OI counts the total number of contracts that are
still open and haven't been closed yet.

For example, trader A (Option Writer) opens a contract by selling a


call option.
Trader B (Option Buyer) buys the contract.
The OI and Volume are 1.
Trader B squares off his position and sells it to another trader C.
The OI is still 1 but the Volume becomes 2.
If Trader A squares off his position then OI becomes 0 and volume
will increase to 3.
How OI Is Used To Identify Support & Resistance?
Support:
● High OI at a particular strike price can indicate where more contracts are still open and
active. A substantial number of traders have vested interests in that price level.
● If the underlying asset's price approaches a strike price with high OI, traders might perceive it
as a level of support, where increased buying interest could emerge due to the presence of
many outstanding contracts.
● Traders might anticipate that option holders will exercise their contracts or close their
positions as the price nears the support level, potentially contributing to upward price
pressure.

Resistance:
● Similarly, high OI at a strike price on the call options side could suggest a potential
resistance level. Call options holders may choose to sell the underlying asset or
write (sell) additional call options as the price approaches the resistance level.
● The increased selling interest could potentially lead to downward price
pressure, as traders expect a higher supply of the asset at that
price level.
Interpreting Call Side
Interpreting Put Side
PCR
PCR = TOTAL PUT OI / TOTAL CALL OI
Extreme Values:

An extremely low PCR value (below 0.5) might signal an oversold market condition,
where fear and pessimism have become excessive. This could potentially lead to a
short-term rebound.

An extremely high PCR value (above 1.5) indicate an overbought market condition,
which is highly optimistic. This could suggest a potential correction or reversal.

Changes in Trend:

A sudden change in the PCR from a bearish to bullish direction, or vice versa,
could indicate a potential shift in market sentiment and a change in the
trend.
PCR Interpretation

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