Top 3 takeaways from Option chain analysis: Shubham Agarwal

F&O Cues

Shubham Agarwal

It is amazing how Option Chain, a listing of all available Options contracts both Calls and Puts can be an analytical tool. No one will disagree that Option Chain does give a fine bird’s eye view of what the Option traders are up to with respect to a particular expiry.

Let us look at 3 of such super easy takeaways to identify a more comprehensive perspective of the Option traders. These are basic observations that can help create a perspective of a few consensus expectations that one can use while trading. They may not be the only reason to trade but definitely have been making a good supporting argument for me for years.

Let us look at Price and Open Interest information posted in the Options Chain to create a few simple observations.

#1 Open Interest in OTM Strikes.

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Shubham Agarwal

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OTM (Out of the Money) strikes are higher Strike Calls and Lower Strike Puts when compared with the current market price of the stock or the index. Most of the Option selling happens in these strikes. They are the holders of the majority of the Open Interest.

Higher Strike Call Selling = Neutral to Bearish View

Lower Strike Put Selling = Neutral to Bullish View

Observation: If there is meaningfully higher Open Interest in OTM Calls than OTM Puts than one can say that more traders (Option Sellers) are holding the Neutral to Bearish view. The same is true the other way around.

Use: Since Option sellers make money only over a period of time, this observation gives idea about more of a positional (1-3 weeks) perspective of majority of traders.

#2 Open Interest in ATM Strikes.

ATM (At the Money) strikes are strikes that are closer to the current market price of the stock or index. This is a space that is crowded by the Option Buyers.

ATM Call Buy = Bullish View

ATM Put Buy = Bearish View

Observation: If there is meaningfully higher Open Interest in ATM Calls than in ATM Puts then one can say that more traders (Option Buyers) are holding an immediate bullish view. The same is true the other way around.

Use: Since Option Buyers lose money with the passage of time, this observation gives an idea about more of the immediate (1-3 days) perspective of the majority of traders.

#3 All Option Prices rise on a lull day.

This does not happen often, but it does on a few lull days when there is not a lot of move in the underlying stock or the index. Here, ideally, both the Call and Put Option prices should be down due to the passage of time and lack of movement.

There are days when instead of being down, the prices are up and that too for both Call and Put.

Observation: Mostly observed after a big consolidation, there are days when we have observed that the underlying has less than 0.5% kind of move and still both Call & Put premiums are up. This would happen when the expected volatility priced into the Option premium goes up for both Calls & Puts.

Use: In rare situations like these one should create an expectation of a big move in the immediate term. One could avoid selling Options without protections immediately.

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