Trade breakouts confidently with Options OI: Shubham Agarwal

F&O Cues

Shubham Agarwal

With Nifty making fresh highs week after week, the biggest problem that one encounters is finding trading opportunities. Something that has already risen is now up for trading for further rise. This rise after rise is called Break-Out trading. Such opportunities can be traded well when we have one crucial validator in place. We are talking about Options OI.

OI short for Open Interest has been a word used by a lot of analysts. Open Interest in simple words is the measure used to account for a number of positions created in a particular Future or Option contract.

Options OI is a very handy tool that can be used to validate the sustainability of the rise and to build expectations of further rise. This is not it. Options OI can help us devise a very economical exit strategy. Such that the impact of being wrong is limited to a very small amount. Thus, Options OI can make trading Breakouts easy. Let us check it out in 2 easy steps. Entry & Exit.

Entry:

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Before entering into the validation part and the reason behind it let us look at the key features of Options OI.

1. Options OI is highest (most of the times) in Higher Strike Calls than Lower Strike Calls
2. Options like Insurance Policies exist because of Insurance companies (Sellers of Options).

Now that we have established this. Let us also lean the significance of this. So, when highest Options OI strike Call gets crossed (Breakout), the Option Sellers panic. Out of Panic they start covering their positions either by buying Futures or Buying Back Calls.

This hasty and additional panic driven Buying power by Call Option Sellers fuel the rally. In other words, supports the Breakout argument. The push created by exiting Sellers attracts more momentum traders to Buy. This creates more pain for Option Sellers pushing the stock even higher.

This significance now creates an entry point for us.

Our breakout trade stock can be put through validation by checking the placement of highest Call Options OI strike and current market price of the stock. If the current price is slightly (1%-3%) higher than the highest Options OI strike, the panic button is about to be set off >> Enter.

However, what is the guarantee that the panic will come, and the stock will go higher only. What if the Call Option sellers are right and the higher move does not sustain.

Well, that is possible and there lies our second step of Exit in this 2 steps confident Breakout trading.

Exit:

In case we do see a lull in the rise and the stock reversing the gains, then the stop loss can also be devised using the same highest Call Option OI strike.

In my experience the validation of Breakout fails once the stock starts trading about 1% below the highest Call Options OI strike.

Options OI can be found on any Options analytics platform of exchange website also. This technique has helped me a lot in trading rise after rise confidently over the years.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.