7/1/2021 Option Chain Analysis with Examples - Dot Net Tutorials

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

Day Trading Strategies

 VWAP Trading Strategy
 Gap Trading Strategy 
 Intraday Open High Open
Low Trading Strategy
 PIN BAR Trading Strategy
 Trading with Sideways
Price Action Area
 Pullback Trading Strategy
 Intraday Breakout Trading OPTION CHAIN COMPONENT
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
 Intraday Trading Course

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 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
WHAT are ITM (IN THE MONEY) OPTIONS?
 Finding Entry
Opportunity using 1. A call option is said to be in ITM if the strike price is less than the current spot price of the security.
Volume Spread Analysis 2. A put option is said to be ITM if the strike price is more than the current spot price of the security.
 Spring and Upthrust
WHAT are ATM (AT THE MONEY) OPTIONS?
Trading Strategy
 VSA 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.
Option Chain Analysis
 Option Chain Analysis WHAT are OTM (OUT OF THE MONEY) OPTIONS?

Indicator  1. A call option is said to be in OTM if the strike price is more than the current spot price of the security.
 RSI Trading Strategy 2. A put option is said to be OTM if the strike price is less to the current spot price of the security.

BTST  Open interest

 BTST Trading Strategy
How Changes in Open Interest Occur
TECHNICAL ANALYSIS
MASTERCLASS If both participants in trade are initiating a new position, the open interest will increase. If both

 Technical Analysis participants are 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
 Market Structure 
interest will remain unchanged.
 Understanding Market
Structure through Swing  Misconception about open interest
 Supply and Demand
Trading (Part – 1) 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
 Supply and Demand
rising
Trading (Part – 2) 

Chart Patterns  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,
 Top 7 Chart Patterns in
PRICE will rise and if sellers are dominating the buyers, PRICE will fall. But BUYERS will always be equal to
Trading Every Trader
SELLERS. So, open interest is rising, which means new contracts are being added. But since PRICE is
Needs to Know
rising with it, it means that LONGS are DOMINATING the transactions. Thus, market/share is STRONGLY
 How to Trade Bull Flag BULLISH. Opposite for bearish trend
and Bear Flag Pattern

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

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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?

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CALLS PUTS

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

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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)

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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

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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

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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

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

Option Chain Analysis in Detail

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

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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

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