Option Chain Analysis in Trading

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Option Chain Analysis in Trading
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 are related to
Option Chain Analysis.
1. What is Option Chain Analysis in Trading?
2. What is open interest?
3. How to study option chain table
4. The element of the option chain table
5. How to interpret option open interest
6. Use of open interest
Market Structure Principles
Price moves within a structural framework of the supply and demand zone. A breakout of
the structural framework supply and demand zone will lead to price movement in the next
area of the framework of the supply and demand zone
OPTION CHAIN COMPONENT

WHAT are ITM (IN THE MONEY) OPTIONS?

1. A call option is said to be in ITM if the strike price is less than the current spot price
of the security.
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?
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.
WHAT are OTM (OUT OF THE MONEY) OPTIONS?
1. A call option is said to be in OTM if the strike price is more than the current spot
price of the security.
2. A put option is said to be OTM if the strike price is less than the current spot price
of the security.
Open interest
How Changes in Open Interest Occur
 If both participants in trade are initiating a new position, the open interest will
increase. If both 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 interest will remain unchanged.
Misconception about open interest
Never think that since the 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 does the PRICE rise or fall? 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, the
market/share is STRONGLY BULLISH. Opposite of bearish trend
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 a 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 do identify support and resistance levels 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
because they feel the stock will not rise above the
respective level
 -ve change in OI implies that call writers are
squaring up because they feel the stock will rise
above the respective level
 +ve change in OI implies that put writers are selling
because they feel the stock will not fall below the
respective level
 -ve change in OI implies that put writers are
squaring up because they feel the stock will 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 the 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 the PRICE is rising but open interest is falling, it means the market is WEAKLY
BULLISH. Short covering
 If the 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 the 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 the 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 are
higher is indicated bullishly
HOW TO KNOW?
 BY CHANGE IN OPEN INTEREST IN PARTICULAR STRIKE PRICE
Let’s study call open interest (CE OI)
Let’s discuss putting open interest (PE OI)

Put Unwinding or Short

Covering

Long Liquidation

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 to feel that
the 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 the price will move
up
 The addition of 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 in Trading concept in a better way.
In the next article, I am going to discuss the Relative Strength Index Trading Strategy.
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 and YouTube Channel as well as my Facebook Group to learn more and clear
your doubts.

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15 thoughts on “Option Chain Analysis in Trading”

1.
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

1.
SANJAY VARSHNEY
AUGUST 9, 2021 AT 2:13 PM

how will you find out in option chain where is buyers and seller

Reply

1.
SANTOSH
AUGUST 16, 2022 AT 7:05 PM

You can go for :-

LONG BUILDUP
SHORT BUILDUP
SHORT COVERING
LONG UNWINDING

etc…..

Reply

2.
RAJK
SEPTEMBER 6, 2020 AT 9:12 AM
 This is awesome

Reply

3.
IMRAN
SEPTEMBER 24, 2020 AT 9:09 PM

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

Reply

1.
SASANGKA MAIREMBAM
SEPTEMBER 15, 2021 AT 2:40 PM

Buyers are retailers like us and seller are like institutions player. .we
will only see the market in view of option seller not buyers.

Reply

2.
SANTOSH
AUGUST 16, 2022 AT 7:07 PM

Imran Bhai
actually this option Chain provides Sellers ie Writers (Call , Put) data
only b/c that is mainly done by big institutions

Reply

4.
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
5.
ATOOL
NOVEMBER 14, 2020 AT 3:33 PM

Need to talk on PCR.. Call me 8329512632

Reply

6.
PRAKASH BANSAL
DECEMBER 3, 2021 AT 7:58 PM

Excellent Article clearly explaining Option Data Analysis.

Thanks You

Reply

7.
AMIT
APRIL 24, 2022 AT 11:45 PM

Many many thanks sir…

Yours is the only article thru which i have understood option chain so clearly. Its
very detailed and correct.. now i get the meanings of figures in Option Chain.. I
have been following since the time you put .net articles on this website 🙂 those
very very clear and precise and helped me many times.. but sir within 1-2 years
you seems to have shifted to stock trading completely.. Thanks and please keep
sharing such great blogs

Reply

8.
HEMANS
MAY 12, 2022 AT 5:36 PM

good work bro

Reply

9.
RAMESH
MAY 14, 2022 AT 10:36 AM
 thank you sir…..it helped me to understand option chain analysis better…

Reply

10.
SAMARENDRAPRATAPJENA
JUNE 8, 2022 AT 1:27 AM

Really very helpful.very easily explained.thanks a lot.

Reply

11.
TEJU
JULY 2, 2022 AT 6:08 PM

guys help me please

If ??
1) Put side
2) Open Interest is increasing
3) Price is increasing
4) then how market is going to move UPSIDE or DOWNSIDE

Reply

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