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Δ OI – Nifty futures and options example.

Today is our second day of the year 2020 and it’s a second day of the journey for us.

As we have the full data for today, we have decided to take nifty as an example, also majority of the people at large trade nifty and banknifty options and this post will pretty much give you enough understanding how to utilize this ΔOI for your trading in index options.

Now before we get into the data, we just want to make a few basic things clear.

  • Don’t be under the impression that following one data point will make you instantly successful.
  • You have to see things as a whole and develop an understanding of the market activity. In this post you will learn how you have to look at different data points and come to a conclusion.

Also just as a refresh of open interest we just thought it’s worth mentioning a few points for the index trading.

  • Any long buildup in futures is bullish for the market and similarly a short buildup is bearish for the market.
  • Any short buildup in put options is bullish for the market and similarly put unwinding is bearish for the market.
  • Any short buildup in call options is bearish for the market and similarly call unwinding is bullish for the market.

The market will go up when there’s a lot of long buildup in futures + Short buildup on puts + unwinding in calls.

In contrast market will go down when there’s a lot of short buildup in futures + Short buildup on calls + unwinding in puts.

In order to assess where market will go you have to consider all these 3 data points and then come to a conclusion, it isn’t like you just see one data point and then jump on to a conclusion.

We have established enough background for moving onto the analysis part for today.

The above is the 10 min candlestick chart of Nifty january futures which clearly indicates a good uptrend.

Now let’s review the ΔOI activity in nifty futures.

A lot of data right? but how do you filter this to identify what’s happening?

We have a small thought to get you on track, do you believe a big buyer/seller can influence the price? If yes, then what you have to look for is the big additions/reductions in the data above which will tell you what they did and at what price they got in or got out.

An important note here is you just have to take the first 10 mins of activity with a pinch of salt i.e. do not always go by that.

Now definitely a question pops up and i.e. why shouldn’t i take it seriously? We are not telling this just like that but there’s a valid reason for this and that is this 9:10-9:20 interval includes the opening change as well which is from post close session on the previous day and the OI change is solely not related to the current day and we want you to look at the current day’s data only. Though it includes the current days 5 mins it’s better to ignore or atleast take this with a little bit of caution.

So ideally your starting point of the day would be 9:20-9:30 not just for today but everyday.

Now if you see the data above you should be looking at those big boys and which quantities are by big boys? the big quantities man! because they are the movers obviously you will see big quantities from them.

Now on looking at the entire data from the start till end what are the biggest quantities for the day?

They are 124k in 9:20-9:30 interval and 152k in 15:20-15:30 interval.

Do other quantities doesn’t matter?, Yes they do but the main trend is formed by these big quantities and if you identify the intention of these big quantities then you are ahead of the game and can be on the right side.

Now, can we say from this that some body just came in and bought truckload at the opening and squared off by closing? You can see the quantities also to be with a gap of 28k between them. Believe us sometimes these quantities can be found exact and almost identical.

So now that we have seen where these big boys got in and got out, you would be wondering were they so confident of no fall during the day? Nope it’s that they will defend any fall that’s going to come or in some cases exit if they are not able to handle the opposite force by causing fake moves.

Now let’s see if we can find any such defenses during the day

Here the question is when would they come to defend? Obviously when price is getting out of control? But when is the price getting out of control? it’s when the price moving away from their entry price in opposite direction.

Notice that the average entry price of that big lot is 11272.1 and during the next 10 mins (9:30-9:40) there was supply 58k but the price was still in control. how? the avg price is still above their entry price.

In the next 10 mins (9:40-9:50) there is again a supply of 26k which brought the avg price close to the big lot’s entry price.

In the next 10 min (9:50-10:00) price was going out of control and then they came to the defense with 78k quantity and the defense continued till 10:30 which moved the price above their entry price by 10 points.

Now after this we didn’t have any significant supply until 13:20 where a 66k supply was there which was even lesser than the defense quantity. But more importantly point here is there is no weakness in price in after this supply also and there’s a counter 54k quantity long immediately and price kept on going higher.

Now that we have completed one full day’s activity review, you should have got a basic idea on how this data works but to simplify it for you here are the key takeaways

  • Where’s the big quantity added? What’s their intention i.e. to move up the market or move it down?
  • Are they defending the opposing price moves away from their entry price? If yes then your understanding of the big qty is correct, else cross check once more on where you are going wrong and stay away if you still don’t get it
  • Now you should pretty much make out which side a big money is playing on.

Pretty long story isn’t it? But wait it isn’t over yet. Now let’s assume you have identified that the big money is long and they are defending the fall in market now when you look at options activity they should also tell you the same tale. In this case since the big quantity was on BUY side there should be PUT options OI addition or CALL options OI reduction as mentioned above.

Now again a question can pop up in your mind, which strikes to see? It’s the most relevant strikes or immediate strikes that you would see in this case since the price was trading between 12250-12300 you would see these two + two = four strikes 12250 CE/PE and 12300 CE/PE

See below are 12250 PE/CE data presented for your reference which says both side shorts buildup happening until unwinding pressure came in calls only after 11:20 until then it was a grind in the market.

12250PE Check on the website for full day’s activity.

12250 CE , Check on the website for full day’s activity.

If you see the above activity there was LONG FUTURES + SHORT PUTS + SHORT CALLS until 11:20 and CALLS started unwinding post 11:20.

Usually if you find the overall option chain to be in sync with big activity in Futures then the job is easy for you and all OI additions can be taken at face value i.e all OI addition is by writers if not start scanning nearest strikes to find an unusual or inconsistent activity opposite to the futures action which is usually a buy from the big guys.

As this post has run into too much of content we thought we could cover specifically the options through examples in the upcoming days but this should have already given you a good start.

Hope you find this content useful.

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7 replies on “Δ OI – Nifty futures and options example.”

Hope this will help both options buyers and sellers. Thanks for the efforts that you put on developing this application.

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