How to interpret F&O indicators: Angel Broking

By Siddharth Bhamre, Head- Equity Derivatives, Angel Broking

Which are the most important concepts that new traders should concentrate on?

First thing which a new trader should keep in mind while in derivatives trading is that leverage can work against you. Other basic concept which they need to know is like unlike equity shares, F&O instruments comes which maturity date and if they wish to continue to have exposure in that underlying through F&O then there is reaccuring cost associated with it. Generally new trader concentrate more on futures segment. I beleive that lot can be done in options segment in terms of different strategies but before that one need to acquire good knowledge about the functioning of the instrument.

Can theory be literally translated to practice? Any points to keep in mind while doing so?

Theory is always designed to understand the concept of the underlying. Theory introduces you to basic characteristics of the instrument. You cant make serious money by just reading theory. One needs to practise theory, understand its limitations, and apply one's own logic to interpret it. Theory cannot be ignore nor it alone can make you a good trader. In derivatives theory can be read in multiple ways. Sometimes theory is applied as it is in practise but sometimes theory is completely opposite of what happens in market. So one needs to understand many theories, filter them and pick the relavant ones and apply them.

How does one interpret open interest data?

Open interest is different from volume and should not be seen in isolation. Open interest is clubbed with price movement of the underlying and then it is interpreted broadly in following manner –

Price	OI	Interpretation
Rising	Rising	Long Formation
Rising	Falling	Short Covering
Falling	Rising	Short Formation
Falling	Falling	Long Unwinding

How should one read the Put Call Ratio?

Put Call ratio is open interest of put divided by open interest of calls. Higher the ratio, higher the puts in system compared to calls. Theoretically higher PCR-OI means negativity in market but practically we have seen opposite. PCR is directly correlated to markets movement. From a longer horizon, ratio around 2.00 indicates over bought market and ration around 0.70 indicates oversold market. It is advisable to see PCR-OI along with built-up in individual strike prices of calls and puts.

How should one read and interpret Rollover data?

When your view is still on and your positions are in current month and the contract is about to expire, you move your positions from current month to next month. This phenomenon is nothing but rollover. Rollover data comes in percentage and absolute figure out of 100 is interpreted whether low or high rollovers have happen. It is also important to see absolute open interest rollover figures too. Also high or low figure does not signify anything unless you know what kind of positions are rolled over or not being rolled over.

What are the popular bull market strategies and What are the popular bear market strategies?

There are various strategies which can be formulated, however masses in our markets in bullish scenario adopt long futures, long call, short put, bull call spread, ratio spread and long call ladders. In bearish market traders generally short futures, buy puts, short call, bear put spreads, ratio put spreads and long put ladders.

What strategy should one adopt in volatile markets?

Depending whether implied volatility is high or low in a volatile market scenario traders generally form long or short straddles and strangles. Preferring naked long options is common phenomenon in a volatile market.

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