Saturday, July 13, 2024
spot_img
HomeFutures & OptionsOption Chain Analysis: Determining Support And Resistance

Option Chain Analysis: Determining Support And Resistance

Price moves within the supply and demand zone’s structural structure. A breakout of the structural framework supply and demand zone will result in price movement in the following area of the supply and demand zone’s framework.

Components of Option Chain 

ITM (in the money) options 

If the strike price of a call option is less than the current spot price of the security, it is considered to be in ITM.

If the strike price of a put option is greater than the current spot price of the security, it is considered to be ITM.

ATM (at the money) options 

If the strike price of a call option equals the current spot price of the security, it is said to be in ATM.

If the strike price of a put option equals the current spot price of the security, it is said to be ATM.

OTM (out of the money) options 

If the strike price of a call option is greater than the current spot price of the asset, the option is said to be out-of-the-money.

If the strike price of a put option is less than the current spot price of the security, the option is said to be out of the money.

Read: Understand Shorting OTM Call Options Strategy

Open Interest – Changes in Open Interest

The open interest will rise if both trade participants initiate a new position. The open interest will decrease if both players are liquidating an old investment.

Read: Exploring Open Interest In Futures

However, if one party initiates a new trade while the other liquidates an existing trade, open interest remains unaltered.

Never believe that when the price rises, more Longs will be generated than Shorts. Longs will always be equal to Shorts, it’s only that Longs are outperforming Shorts in the transaction, which is why the Price is rising.

The number of shares purchased is always the same as the number of shares sold. So, what causes the price to climb or fall? Due to purchasing pressure or selling pressure. So, if buyers outnumber sellers in a contract, the price rises; if sellers outnumber buyers, the price falls. Buyers, on the other hand, will always be equal to sellers. As a result, open interest is increasing, which indicates that new contracts are being added. However, because the price is increasing with it, Longs are dominating the trades. As a result, the market/share is strongly bullish. The inverse for a negative trend.

Writing is more important 

Writing holds greater significance in trading due to the need for conviction in facing unlimited risks and requiring substantial capital. Sellers, often represented by big institutions, possess significant financial resources and are typically considered more informed. On the other hand, buyers, commonly retail traders, are attracted by the convenience of lower capital requirements. The belief that institutions are usually right underscores the importance of selling. Additionally, a high level of open interest in options signals a substantial bet against the corresponding strike price, emphasizing the significance of selling positions.

Option  Meaning  Result 
CALL OI Sellers are betting market won’t go up Bearishness
PUT OI Sellers are betting market won’t go down Bullishness

Identifying Support and Resistance based on option chain open interest 

Support and Resistance

  • When call option Ol created
  • Some big is betting it won’t go above that mark
  • They are most likely right
  • High chance the strike level will not be crossed
  • The level usually acts as a resistance zone

CALL OI = RESISTANCE

When put option Ol created

  • Some big is betting it won’t go below that mark
  • They are most likely right
  • High chance the strike level will not be crossed
  • The level usually acts as a support zone

PUT OI = SUPPORT

To identify support and resistance levels or zones using open interest (OI): 

Firstly, look at the highest open interest (OI) column on both the call and put sides of the options chain. Then, take note of the corresponding changes in OI. For support, focus on the put side where you find the biggest open interest number with a positive change in OI. This indicates strong support. On the resistance side, look at the call side for the largest open interest number with a positive change in OI, suggesting a robust resistance level. In simpler terms, you’re identifying key support and resistance levels based on the highest OI numbers and positive changes, helping you gauge potential market turning points.

Price trading at 21,700 is Resistance if broken net resistance is at 21,800 and 22,000 where strong support is at 21,500.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.
RELATED ARTICLES
Continue to the category

LEAVE A REPLY

Please enter your comment!
Please enter your name here

spot_img

Most Popular