Thread by @ICICI_Direct

How to read an option chain (Introduction) - Basic Level

A thread ✍️🧵
1/n #LearnwithICICIDirect

This thread covers different terms associated with an option chain excluding greeks that will be covered later.

2/n
Option Chain is divided into 2 parts:
1⃣Calls (Ce)
2⃣Puts (Pe)

2/n
When to buy Call vs Put:
🔸Call: When a trader is expecting the market to go up
🔸Put: When a trader is expecting the market to go down

Remember, one can also sell an option strike instead of buying:

3/n
🔸If you expect the market to go down you can sell a Call option rather than buying a Put option
🔸If you expect the market to go up you can sell a Put option rather than buying a Call option

If someone is:
🔸Bullish - Buy Call/Sell Put
🔸Bearish - Buy Put/Sell Call

4/n
Let us list down the important terms associated with an Option Chain:
🟠Open Interest (aka OI)
🟠Change in OI
🟠 IV
🟠Volume

We will cover the first 2 in this thread rest in Part-2

5/n
What is an Open Interest?

"Open interest refers to the total number of outstanding derivative contracts that have not been settled"

IF you’re reading this kind refer to the Option Chain as well, this will help you in more.
nseindia.com/option-chain

6/n
First we look out for the Strike Price for the Highest OI
Strike Price = 17,000,16900 highlighted above

Understand we are reading the Option Chain from a perspective of an options seller and not an options buyer

7/n
🔸The highest OI on the Call side indicated resistance
🔸The highest OI on the Put side indicated support

Please refer to tweet 3/n in case you're confused

This helps us in understanding the range of the market with the help of the highest OI on both sides

8/n
For Example: Refer to the image (Highest OI in CALL side is at 17200 and Highest OI in PUT side is at 17000).
This indicates that range for NIFTY is 200 points

Please refer to the highlighted boxes.

9/n
So once the range is set, the traders take their position based on the data.
But does this stay the same everyday?
The answer is NO!

This we can see with the help of Change in OI section right next to the OI section in the option chain

10/n
The change in OI helps us in to determine where is the range shifting,
The above option chain is of 24/3/2023;
The range according to Highest OI data was 17200-17000 but Nifty eventually closed at 16945, why did that happen and what should one do in that case?

11/n
Observe the boxes,
The highest change in OI on Call & Put side can be seen at 17000 & 16800 strike respectively, this was an indication that the traders are expecting the market to go down due to a shift in range. The new support was emerging at 16800 & resistance at 17000

12/n
Notice the Nifty price on 24/3/2023:
High: 17109.45
Low: 16917.35

If you carefully notice the behaviour of Nifty, it went up after taking support near 17000 (Highest Pe OI) later in the day it started moving down which can be observed in the data which indicated weakness

13/n
So our key takeaway so far is:
1⃣ Observe the highest OI to determine a broad range of the market
2⃣ Observe the Change in OI section to notice whether the range is still same or there is a build up happening at different strike to determine the move of the market

14/n
Now let us cover 2 more terms associated with Options Trading:
1⃣ Short Covering
2⃣ Long Unwinding

We will take the same range of Nifty i.e. 17000-17200 to understand these terms

15/n
🟠 Short Covering:
Sometimes due to some news or some expectation index/stock will try to breach the RANGE (i.e 17200–17000)
Once Nifty starts sustaining above 17200 then, the CALL writers at 17200 will be at risk (LOSS)

16/n
They will look to square-off (SELL) their position and the OI will start decreasing at that particular strike. This process of Squaring off by a Call Writer is known as SHORT COVERING

So by looking at this data, we can say that short covering will only happen above 17200

17/n
🟠Long Unwinding:
Similarly, for a PUT writer if NIFTY trades below the HIGHEST OI Strike, he will cover his LONG & this process is called LONG Unwinding

So looking at this data, we can say that Long Unwinding (Selling pressure) will only happen below 17000

18/n
Once Nifty started sustaining 17000, which was a support based on OI data, there was a fast momentum on the downside towards 16900 and the new support that was emerging was 16800 which was held at closing

19/n
📢Tip from trader's corner:
The Highest strike OI keeps changing during the market, whenever the change in OI is more than 10%, you can say that a short covering or a long unwinding may take place

Also, you cannot trade by only looking at the option chain so stay tuned

20/n
We have covered the basic of how to read an option chain in this part, we will be covering the advance version soon i.e.
1⃣ Option Greeks
2⃣ Impact of IV
3⃣ Moneyness (In the money, Out of the money & At the money)
4⃣ Option Strategies

Stay tuned for more.....

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