Use Options OI for intraday trading: Shubham Agarwal

F&O Cues

The market has been in a rather standstill mode in terms of real return for the last couple of quarters, at least. This puts pressure on us traders to pull gains out of our trades. While positional trades do not perform with a lack of movement, choppy range-bound markets do give us opportunities on an intraday basis.

The gains are smaller, and the trades are often, but it is better suited for a market with heavy mood swings. As they say, there must be a method to this madness. So, let us define the method using a critical Options data called Open Interest (OI).

What is OI?

OI refers to the number of contracts open. Unlike shares, where the total number of shares is known, Options contracts can be created without any such physical referencing. In simple words, when any new Buyer and Seller come together and create a trade, it creates an OI of 1 contract.

What is the significance of Options (Sellers) OI?

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Options OI is created with the help of both the Buyer and the Seller. However, we all know Options are like Insurance policies. Here too, a buyer will pay a premium for some event happening (The 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, an insurance policy can not exist without Insurance companies. Just like that, Options OI has Option Sellers more important counterpart than Buyers. Since Option Sellers are taking unlimited (better put, Unknown) risk to get a small premium, they are expected to have a better grip on the underlying stock or index’s expected movement.

We can say that the Strike with Maximum OI has a lot of Option Sellers. More Sellers = Stronger players believe in the trade they have taken.

How do we follow the Highest OI Strike Trade?

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 the Highest OI Call Strike means Strong resistance, as most Option Sellers are of the opinion (Generally, this strike is higher than the current market price). Similarly, the Highest Put OI could mean strong support.

We can use this as an input for our Positional trading.

How to use it for Intraday Trading?

Just like any other support and resistance. Evidence that suggests, whenever such a highest Call OI (which is above the current price) or a 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.

How to Trade?

As soon as the highest Call OI strike is crossed, buy that Call with a stop loss a few points below the Strike Price. Similarly, as the highest Put OI strike is crossed by the Put with a stop loss few points above the Strike Price. I have seen the majority of such trades ending up in profit due to momentum supporting them.

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.