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Price Action
Option Chain Analysis
 How to Study Candlestick
 Candlestick Analysis 
Back to: Trading with Smart Money
 Price Action Analysis
 Advanced Price Action
Analysis
 Thrust Pullback and
Measuring Move Analysis
 How to Trade with Smart
Money
 Supply and Demand Zone
Trading Elliott Wave Detection Tools
 How to Day Trade with
WaveBasis Open
Trend
 Multiple Time Frame
Analysis Option Chain Analysis in Trading
 Head and Shoulder Pattern
 How to Trade with Support In this article, I am going to discuss the Option Chain Analysis in Trading. Please read our previous article where we discussed
Opening Range Breakout with examples. At the end of this article, you will understand the following pointers in detail which
and Resistance
are related to Option Chain Analysis.
 Advanced Candlestick
Analysis
1. What is open interest?
 Trendline Trading Strategy 2. How to study option chain table
 WRB Trading Strategy 3. The element of the option chain table
4. How to interpret option open interest
Day Trading Strategies 5. Use of open interest
 VWAP Trading Strategy
Market Structure Principles
 Gap Trading Strategy 
 Intraday Open High Open Price moves within a structural framework of the supply and demand zone. A breakout of the structural framework supply and
Low Trading Strategy demand zone will lead to price movement in the next area of the framework of the supply and demand zone
 PIN BAR Trading Strategy
 Trading with Sideways Price
Action Area
 Pullback Trading Strategy
 Intraday Breakout Trading
Strategy

Risk Management
 3 Techniques for Risk
Management in Trading

Stock Selection & Live Scanner

 How to make own Day
Trading Scanner
 Stock Selection for Intraday
Trading

Intraday Trading Course 2020

OPTION CHAIN COMPONENT
 Intraday Trading Course
 Multiple Timeframe
Analysis for Intraday
Trading 
 VWAP Trading
 Opening Range Trading
Strategy
 Opening Range Breakout

Volume Price Action Analysis

 Volume Analysis in Trading
 Volume Price Action
Analysis
 Volume Spread Analysis in
Trading
 Candlestick Pattern
Analysis
 Finding Entry Opportunity
using Volume Spread
Analysis
 Spring and Upthrust Trading
Strategy
  VSA Trading Strategy WHAT are ITM (IN THE MONEY) OPTIONS?

Option Chain Analysis 1. A call option is said to be in ITM if the strike price is less than the current spot price of the security.
 Option Chain Analysis 2. A put option is said to be ITM if the strike price is more than the current spot price of the security.

WHAT are ATM (AT THE MONEY) OPTIONS?

Indicator 
 RSI Trading Strategy 1. A call option is said to be in ATM if the strike price is equal to the current spot price of the security.
2. A put option is said to be ATM if the strike price is equal to the current spot price of the security.
BTST 
 BTST Trading Strategy WHAT are OTM (OUT OF THE MONEY) OPTIONS?

TECHNICAL ANALYSIS 1. A call option is said to be in OTM if the strike price is more than the current spot price of the security.
MASTERCLASS 2. A put option is said to be OTM if the strike price is less to the current spot price of the security.
 Technical Analysis
Open interest
 Market Structure 
 Understanding Market How Changes in Open Interest Occur
Structure through Swing 
 Supply and Demand Trading If both participants in trade are initiating a new position, the open interest will increase. If both participants are
(Part – 1) liquidating an old position, the open interest will decline.
If, however, one participant is initiating a new trade while the other is liquidating an old trade, open interest will remain
 Supply and Demand Trading
unchanged.
(Part – 2) 
Misconception about open interest

Never think that since PRICE is rising, more LONGS are being created than SHORTS. LONGS will always be equal to SHORTS
just that LONGS are dominating SHORTS in the transaction, that is why PRICE is rising

The number of shares bought is ALWAYS EQUAL to the number of shares sold. Then why PRICE rises or falls? because of
buying pressure or selling pressure. So, if buyers of a contract are dominating the sellers, PRICE will rise and if sellers are
dominating the buyers, PRICE will fall. But BUYERS will always be equal to SELLERS. So, open interest is rising, which means
new contracts are being added. But since PRICE is rising with it, it means that LONGS are DOMINATING the transactions.
Thus, market/share is STRONGLY BULLISH. Opposite for bearish trend

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OPEN OPEN

WRITING/Selling(Sellers) is more important here….. Why…?

It takes conviction to sell as there is Unlimited risk and more money required
Sellers are usually someone with Big money like Big Institutions
Buyers are usually retail traders as it is convenient with the less required capital
Institutions are usually right
Large option open interest means massive bet against that strike price
Use of open interest data

To identify support and resistance

To find out when support resistance will break
Direction of trend

Identifying Support and Resistance based on option chain open interest

How to identify support and resistance level or zone?

STEP 1 find the highest OI column on both sides (call and put side)
STEP 2 note the corresponding change in OI
SUPPORT (PE) biggest open interest number + positive change in open interest
RESISTANCE(CE) biggest open interest number + positive change in open interest

How to know where is the resistance in an all-time high price?

By analyzing the option chain data

PARTICULAR STRIKE PRICE in Option Chain Analysis

Now we will study what is a particular strike price showing us?

CALLS PUTS

+ve change in OI implies that call writers are selling +ve change in OI implies that put writers are selling
because they feel the stock will not rise above the because they feel the stock will not fall below the
respective level respective level
-ve change in OI implies that call writers are squaring -ve change in OI implies that put writers are squaring
up because they feel the stock will rise above the up because they feel the stock will fall below the
respective level respective level

“STRIKE PRICE” will show any of the following:

1. LONG BUILDUP
2. LONG LIQUIDATION
3. SHORT BUILDUP
4. SHORT COVERING

LONG BUILDUP in Option Chain Analysis

If PRICE is rising and open interest is rising, it means the market is STRONGLY BULLISH. LONG BUILDUP
 If PRICE and OI both are rising, it means that the new contract that is being added is dominated by bulls, that’s why
PRICE is rising with every new contract addition.

Short-covering in Option Chain Analysis

If PRICE is rising but open interest is falling, it means the market is WEAKLY BULLISH. Short covering

If PRICE is rising but open interest is falling, it means that the rise in price is due to SHORT COVERING and not
bullishness. See why is OI falling? It’s falling because positions are being squared off and the number of open contracts
in the market is reducing. But since PRICE is rising with it, it means that SHORTS are SQUARING OFF and dominating
LONGS in the transaction. See, how would SHORTS square off? They will square off by BUYING. That is why PRICE is
rising. So, PRICE is not rising because LONGS are dominating. It is rising because SHORTS are dominating the squaring
off process. Thus, it can not be called BULLISH. It is WEAKLY BULLISH. It can be a TRAP for new LONGS.
Rally Extrapolating from the general rule, price up with high volume is bullish. However, if open interest drops during this
same trading session, a bearish reading of that variable results. The internal condition of the market during such a
trading session would be that of short covering. A short-covering rally is a very weak technical situation. The technician
can state that the decline in open interest is more bearish than the high volume is bullish. In fact, if the volume is so
high that it can be considered to be of blowoff proportion, the volume reading would also be bearish-signaling at least a
temporary reversal of the price uptrend

SHORT BUILDUP in Option Chain Analysis

If PRICE is falling, open interest is rising, the market is STRONGLY BEARISH.

If the price is falling and open interest is rising, it means that SHORTS are dominating the LONGS. And since open
interest is rising, it means that new contracts are being added. But, since the price is falling, it means the new contracts
which are being added are dominated by SHORTS, not LONGS. Hence, it is STRONGLY BEARISH.

LONG LIQUIDATION in Option Chain Analysis

If PRICE is falling and open interest is falling, the market is WEAKLY BEARISH.

If PRICE is falling and open interest is falling, it means that the fall in price is due to LONG COVERING or also called
LONG UNWINDING. See why is open interest falling? It’s falling because positions are being squared off and the
number of open contracts in the market is reducing. But since PRICE is falling with it, it means that LONGS are
SQUARING OFF & dominating SHORTS in the transaction. how would LONGS square off? They will square off by
SELLING. That is why PRICE is falling. So, PRICE is not falling because SHORTS are dominating and creating new
positions. It is falling because LONGS are dominating the squaring off process. Thus, it can not be called BEARISH. It is
WEAKLY BEARISH. It can be a TRAP for new SHORTS.

MARKET DIRECTION BASED ON OPTION OI

In which direction both support and resistance are shifting. if both shiftings higher is indicate bullishly

HOW TO KNOW?

BY CHANGE IN OPEN INTEREST IN PARTICULAR STRIKE PRICE

Let’s study call open interest (CE OI)

Let’s discuss put open interest (PE OI)
Let’s combine both calls and put

Call writer adding(increasing) and put writer exiting(decreasing)=bearish

Put buyers adding(increasing) and call buyers exiting(decreasing) = bearish
Call writer decreasing(exiting)and put writer adding(increasing)=bullish.
Call buyers increasing(adding) and put buyers decreasing (exiting )=bullish
OPTION CHAIN TABLE FOR ABOVE CHART
WHAT HAPPEN NEXT

Let’s see the option chain data for this chart

BREAKOUT/REVERSAL

Let’s study bullish breakout and

Bull to bear reversal

REVERSAL STUDY

If near CE OTM strike price has the highest open interest and positive change in open interest, then the price will not
break that level. means call writers feel that price will not move above that level
PUT WRITER exiting means open interest decreasing in ATM and ITM PE, THEY FEEL THA PRICE WILL MOVE BELOW
THAT LEVEL

BREAKOUT STUDY

If near CE OTM strike price has changed in negative open interest, then the price will break that level. call writer is
exiting means they are feeling price will move up
Addition in ATM AND ITM PE means put writers are bullish
Put Call Ratio (PCR)

HIGH PCR =BULLISH

 More puts than calls
Big sellers are selling puts, more than calls
This means they are saying the market won’t go down much

Please watch the following video if you want to learn and understand the Option Chain Analysis concept in a better way.

Here, in this article, I try to explain the Option Chain Analysis in Trading. I hope you enjoy this Option Chain Analysis in Trading
article. Please join my Telegram Channel to learn more and clear your doubts. https://t.me/tradingwithsmartmoney.
 ← Previous Lesson Next Lesson →
VSA Trading Strategy RSI Trading Strategy

5 thoughts on “Option Chain Analysis”

SENTIL
JULY 6, 2020 AT 1:00 PM

Thanks for your nice&useful article,

Call writer adding(increasing) and put writer exiting(decreasing)=bearish

Put buyers adding(increasing) and call buyers exiting(decreasing) = bearish
Call writer decreasing(exiting)and put writer adding(increasing)=bullish.
Call buyers increasing(adding) and put buyers decreasing (exiting )=bullish

what is that writer? can’t understand…..

Reply

RAJK
SEPTEMBER 6, 2020 AT 9:12 AM

This is awesome

Reply

IMRAN
SEPTEMBER 24, 2020 AT 9:09 PM

How to identify who is put writers and who is put buyers

Reply

PRADEEP RAUT
OCTOBER 23, 2020 AT 3:02 AM

Grand Salute Sir, such a great knowledge you are providing to us without any charges. I m learning alot but some question are
arising in my mind somewhere but not able to clear it. I am a self learner trader lake of knowledge about trading (going
through with loses and loses in trading) . Whoever I try to ask they never guide without money. But you are only who is giving
us such a great knowledge about trading that also free which is really appreciated. I wish I could contact you… Thank you so
much and God bless you sir. 🙏🙏🙏
Reply

ATOOL
NOVEMBER 14, 2020 AT 3:33 PM

Need to talk on PCR.. Call me 8329512632

Reply

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