Intraday trading has always had an exciting touch to it because of the quick entry and exit and because of lack of commitment required. This has picked up so much steam that we have many such intraday trades that enter and exit within seconds.
The system to trade intraday is critical here. Reason behind the trade must be solid for the expectation of solid outcome. 3 Simple questions need to be answered. What, When and How to Trade?
What to Trade?
Answer to what to trade lies in OI, short for Open Interest data of Options.
Open Interest (OI) refers to number of contracts open. Unlike shares where total number of shares is known, Options contracts can be created without any such physical referencing. In simple words, any new Buyer and Seller when come together and create a trade, it creates an OI of 1 contract.
Yes, Options OI is created with the help of both Buyer and Seller. However, we all know Options are like Insurance policies. Here too a buyer will pay premium for some event happening (Call buyer will want the event of a big bullish move). If that does not happen the premium will turn to 0.
Extending this a bit further, Insurance policy can not exist without Insurance companies. Just like that Options OI has Option Sellers more important counter part than Buyers. Since Option Sellers are taking unlimited (better put Unknown) risk to get small premium, they are expected to have better grip on the underlying stock or index’s expected movement.
Mixing the OI + Significance, we can say that the Strike that has Maximum OI, means that it has a lot of Option Sellers. More Sellers = Stronger players believe in the trade they have taken.
- Call Option Seller’s View = Stock / Index should not go above the Strike Price (Opposite of Buyer’s view)
- Put Option Seller’s View = Stock / Index should not go below the Strike Price
Now, that said we can also say that Highest OI Call Strike = Strong Hurdle on the Upside as most Option Sellers are of the opinion (Generally this strike is higher than current market price).
Similarly, Highest Put OI = Strong Hurdle on the Downside
This is what we trade.
When to Trade?
We can compare these hurdles as flood gates holding the flow of price. We all know that if the flood gates are broken what happens.
Evidence shows, whenever such Highest Call OI (which is above the current price) or Highest Put OI (which is below the current price) is crossed, there is momentum. This is because many strong players are proven wrong by the market. This will lead to chaos and chaos will lead to momentum. Crossover of this highest strike is when we need to trade.
How to Trade?
As soon as the Highest Call OI strike is crossed Buy that Call with a stop-loss few points below Strike Price. Similarly, as the Highest Put OI strike is crossed Buy the Put with stop-loss few points above the Strike Price. I have experienced more than half of the time the trade ends up in profit and with momentum helping the winning trade, this setup could get decent returns over a period of time.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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