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Open interest basics Option chain

Decode the Live option chain

We have discussed about the concept of open interest from basics to advanced through our posts on different concepts relating to the same and also discussed about participant wise open interest report.

Read all those earlier posts to get a good understanding of the concept of open interest.

In this post our main focus is interpreting the option chain in the most smart and simple way which can help you assess the market sentiment at a particular point of time.

option chain data
The option chain that you see on the NSE india website, Courtesy: NSE website

The above is an image of option chain from the NSE website and can be accessed through this link NSE option chain.

First doubt to everyone out there is, is this data real-time?

The answer is it’s almost real-time i.e. delayed by a minute from other sources like terminal or other real-time data platforms including our platform.

So if you are using this data from the NSE website you get to see this data delayed by a minute.

Next question is how to interpret this data that i see?

First learn all basics about open interest and open interest in options to be able to interpret this data. Refer to our post on Options OI basics which can provide you enough conceptual clarity.

Now presuming you know what options OI and it’s changes indicate about market sentiment, let’s move on to the interpretation from the option chain.

  • In the image above all the data pertaining to the call options is on the left side of the image and all the data pertaining to the puts is on the right side of the image.
  • The outstanding open interest for calls or puts can be seen in the column named “OI” on the left and right side against the respective row for the strike price respectively.
  • The change in open interest for calls or puts can be seen in the column named “Chng in OI” on the left and right side against the respective row for the strike price respectively.

Now that you are aware on which columns you can see the relevant data, let’s move on to the part of assessing market sentiment based on the data

There are three market views or scenarios that can be present at any given time, these are BULLISH , BEARISH and RANGE BOUND.

Indications from the data in table which can be translated into the scenarios listed above is as follows.

BULLISH – The Sum of all numbers in “Chng in OI” column on the right side (i.e. puts) of the table is significantly more than the Sum of “Chng in OI” column on the left side(i.e. calls) of the table.

BEARISH – The Sum of all numbers in “Chng in OI” column on the left side (i.e. calls) of the table is significantly more than the Sum of “Chng in OI” column on the right side(i.e. puts) of the table.

RANGE BOUND – The Sum of all numbers in “Chng in OI” column on the left side (i.e. calls) of the table is not significantly more than the Sum of “Chng in OI” column on the right side(i.e. puts) i.e. the changes are more or less equal on both sides.

Is it this simple to form a view on the market?

YES, this is the case in most scenarios but there are exceptions which are mentioned below.

Before moving to the exceptions, we just wanted to mention about few best ways of seeing the Live OI activity.

The first thing that you should be looking at in the options chain is the maximum number in the “chng in OI” column on either side call/put – this usually tells you the side where writers are active.

Next you would see at an overall level which side OI additions are more. – With this you would now have a “view” on the market

Next see for unwindings at opposite side i.e. if you see good OI additions on call side, there should be some unwinding already in place on the put side. the absence of this can mean a range-bound action.

The strike-price where there is unwinding happens to be the place of strong support/resistance.

Now, we present the exceptional scenarios that you should be aware of so that you appreciate the Live OI activity with much improved accuracy.

Exception 1: Previous day’s Participant-OI report shows institutions bought some options either call/put instead of selling options. In this scenario the general interpretation doesn’t apply to the side of the options that they are holding LONG atleast in the first hour of next day. As an example if institutions are holding Long in call options then increase in open interest on call side is not bearish for the market and decrease in open interest on call side is not bullish for the market. But until when? until they exit their long options.

Exceptions 2: When price is not trading in sync with the option chain, the market should normally trade according to the sentiment resulting from option chain but if that’s not the actual case that you see then there’s something beyond the general interpretation and you should brainstorm and breakdown the OI activity in each of the strikes to understand if there is a possibility of LONG options activity through OI addition that’s resulting in the market not confirming the view from general interpretation of options OI. It is usually in these cases you should be expecting big movements as this indicates that institutions are betting on LONG side of the options which is kind of an unusual scenario and causes trending moves.

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