Basic of option chain analysis
Many traders, especially intraday players trade-in options and this sector creates a large volume on the exchange. Nifty and bank nifty are the most traded options on NSE. The main reason for the buying option is that it is a tool for making unlimited money with very small capital and risk is limited to the premium you pay.
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- It can double or triple your money within a day. But the question we need to ask ourselves how many traders make money in long terms by buying options? The answer may surprise you
- Stock market educators or institute vs retail traders
- It is shown that more than 80% out of money options become zero on expiry day and hence very few are successful traders are there who make money in the long term.
- How professional traders trade?
- Most of them are option writers. It means option buyers are net losers. It doesn't mean you can't make money with buying option strategy.
- But you need to be very careful and risk management should be your main priority. Here I would like to write in detail about how it works and how we can analyze the overall trend of the market. And my analysis is basically contrarian theory.
- The put-call ratio(PCR) is the well-tested benchmark. To find out the put-call ratio we need to divide total put open interest by total call open interest.
- If PCR is above 1 it signifies bull trend and below 1 signifies a bearish trend. I personally have my own standard.
- Below 0.8 it is bearish and above 1.2 it is bullish.
- The strikes where you see maximum call open interest(OI) works as resistance and the strike with maximum put OI works as support.
- If total call addition is more than total put addition on a particular day then you should look for short in underlying stock. If total put addition is more than total calls you should look for buy-in underlying stock.
- If call unwinding is happening with put addition it is a signal of a confirmed long trend. And if there is put unwinding with call addition it is confirmed downtrend in the underlying stock.
- If the price goes above the strike where maximum call exists and call unwinding doesn't happen then you should look for short in underlying stock.
- If the price goes below the strike where maximum put OI exists and put unwinding is not happening you should look for buy-in underlying stock.
- Option premium increases with volatility increase. And premium falls if volatility decreases. Browsers gauge for volatility is India vix.
- Always use option OI with the technical chart. Because of the impact of option addition or unwinding you can see after some time. Sometimes you see the impact on the next day. In short, to find the overall trend you should look at the option chain and take entry and exit look at your chart with support and resistance lines drawn.
- In liquid stocks like SBIN, icicibank, infy, tcs, reliance, hdfc bank option chain analysis is most reliable. If liquidity is very low option chain analysis is less reliable.
- Risk management is the most important whatever you do. If you are wrong just press the exit button which is very difficult for traders because of emotion.
- Hope you find this writing very useful.
- Option traders should have good mental arithmetic
- Comparing stock price behavior with the previous day
- whatever happened in the stock market yesterday will happen today and happen again in future
- Study every price movement in the stock and you will found out that it is behaving the same way as it always did before it breaks down or break out 1-2%. Note down the stock price on Monday, and remember the Friday price movement and trying to predict what will be the price on Tuesday and on Wednesday and match the actual price of the stock with prediction.
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2 Comments
Very Informative guidence.
ReplyDeletethnx.
Informative.
ReplyDeleteThank you for your valuable comment