Learn option chain analysis of Nifty 50

Learn option chain analysis of Nifty 50

Procedure:

1. Visit Nse India website 
2. There are three-term used in option chain analysis
3. Call, Put and Strike Price 
4. A trader who purchase the call options thinks nifty 50 prices will increase.
5. A trader who purchase the put options thinks nifty 50 prices will decrease.
6. There are 3 different options to purchase a call and put options.
7. In the Money
8. Out of money
9. At the Money

In the Money call and put options

1. When the strike price of the call option is less than nifty 50 price that strikes price is in the money.
2. When the strike price of a put option is more than nifty 50 prices that strikes price is in the money.

Out of Money call and put options

1. When the strike price of the call option is more than nifty 50 price that strike price is out of money.
2. When the strike price of a put option is less than nifty 50 prices that strike price is out of money.

At the Money call and put options

1. When the strike price of the call option is equal than nifty 50 price that strikes price is at of money.
2. When the strike price of a put option is equal than nifty 50 price that strikes price is at of money.

• How to find support and resistance using the options chain?
• Check highest open interest call side it is resistance 
• Check highest open interest put side it is support

• How to identify nifty direction?
• Record highest open interest data daily 
• Check the changes in open interest
• If the highest open interest  on put side increase and call side decrease Market will move up
• If the highest open interest  on call side increase and put side decrease Market will move up

• How to find support and resistance using the options chain?
• Check highest open interest call side it is resistance 
• Check highest open interest put side it is support

• How to find the probability of nifty 50 movements at a particular level?
• Check this link https://stockfuturesnse.blogspot.com/2019/05/option-chain-probability-excel-sheet.html

Standard Rules of Option chain analysis:

• How to analyze Short and Long positions build-up using the options chain?
• There are 4 possible case for this analysis

• Case 1
• Call side option price increase and open interest increase 
• Put side option price decrease and open interest increase 
• If both conditions fulfill then the market will move up.
• The fresh position is created call side and put side 
• Maximum addition in open interest in call side act as a resistance
• Maximum addition in open interest in put side act as a support

• Case 2
• Call side option price decrease and open interest increase 
• Put side option price increase and open interest increase
• If these both conditions fulfill then the market will move Down

• Case 3 -  Short covering call side
• Call side option price increase and open interest decrease. 
• Put side option price decrease and open interest Increase
• If these both conditions fulfill then the market will move UP due to short covering on the call side.
• But why shorts covering also leads the market to move up or down?
• Shorts covering generally happens when there is positive or negative news in the market
• Previous day positions on the call side which were acted as a resistance to the market are now sifted to the put side to act as a support due to some good news for the market.
• Big players book their losses in the call side and create the position in put side to minimize the losses or to gain greater profits from out side options 
• This process happens in both put and call side - call side short covering leads the market to move up
• ut side short covering leads the market to move down

• Case 4 -  Short covering put side
• Call side option price decreases and open interest increases. 
• Put side option price increases and open interest decreases
• If these both conditions fulfill then the market will move down due to short covering in put side

• Case 5
• Call side option price decrease and open interest decrease. 
• Put side option price decrease and open interest decrease
• If these both conditions fulfill then the market will remain sideways.

Max pain theory in the option chain

• Max pain theory is used for call buyers - Generally, in the stock market, the smart money used to sell the options  and retail investors buys the options 
• Option selling required high margin and options buying required small margins  
• 95% of open interest in options expires at zero and 95% retail investors lose money in that options and smart money earn money from the premium
• To cover the large no of retail investors money max pain theory is created
• In max pain theory the sum of call side open interest and put side open interest at particular strike price premium should be zero or near to the value when the option expires
• This theory covers maximum retail investors and large no of retail investors lose money in option on the expiry day.    

Use max main theory to find the direction of the market

• As we already discussed the maximum open interest act as a support and resistance in the stock market
• First, we need to calculate the total open interest in the call side and put the side of the various strike prices.
• After calculating find the highest open interest strike price 
• After finding the highest open interest strike price find the difference between the nifty closing price and strike price.
• If nifty closing - highest open interest strike price value is greater than the premium of nifty closing stock price market will return to the highest open interest level
• E.g. nifty closing at 12226 - 12000 is the highest open interest the difference here is 226 and the premium of nifty 12200 is 75+50 = 125. Therefore the difference is greater than the premium nifty will move down but how much?
• To find the value of the movement 
• Find the value find the sum of second-highest open interests and their premium.
• The movement will be 25-30 % less the premium of the second-highest open interest 
• E.g. Second highest open interest is at 12200 and the premium of 12200 both call and put side is 125. The downside movement will be 100 from the 12200 level 
• In this way, maximum call buyers will lose money on the expiry day.

Please leave your comment in the comment box to share your suggestions and ask any questions you have.

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