5/7/2021 How To Analyze Call and Put Writing and Predict Trends - BullBull

How To Analyze Call and Put Writing and

Predict Trends
BY SUNIL.TINANI / ON JUNE 1, 2018 / AT 10:13 AM / IN MARKET IQ , OPTIONS 3172 VIEWS

Learning how the NSE Options Chain works can result in many profitable intraday, short, medium and long
term trades.

To understand the basic concept of Open Interest (OI), please read through this article.

I’m now assuming that you now know how OI is calculated and that you know the implications.

STEP 1: Let’s open the Nifty Options Chain Page for 28 June 2017:

Date: 1 June 2018 – Time 1.27 PM

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Note the shaded portion (in light pink tones, both on the left and on the right).

It represents In The Money Strike Prices.

Here is what In The Money and Out of The Money Strike Prices imply:

A. In the Money (ITM)

– (For Call options) When strike price is below the stock price. Example, if you buy Nifty 10200CE and the
spot price is 10700.

– (For Put options) When strike price is above the stock price. Example, if you buy Nifty 10800PE and the
spot price is 10700.

At the Money (ATM) – When strike price is equal to the stock price. Example, if you buy Nifty 10700CE or
PE and the spot price is 10700.

B. Out of the Money (OTM)

– (For Call options) When strike price is above the stock price. Example, if you buy Nifty 10800CE and the
spot price is 10700.

– (For Put options) When strike price is below the stock price. Example, if you buy Nifty 10500PE and the
spot price is 10700.

Step 2: Understand the concepts of Call and Put Writing

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A writer of a call or a put is a seller.

He sells both calls and puts because he feels the strike prices won’t hit and he will earn the premium. He also
assumes that any buyer of an OTM call or Put is a rash trader.

This is why call and put writers are very active in Out-of-the-Money strike prices, and this is where we must
get our clues from.

Step 3: Copy the Data and paste on an Excel Sheet

I’ve copied all data and pasted it on an Excel sheet focusing on strike prices between 10050 and 11200.

Step 4: Interpret The OTM Call Writing

I’ve highlighted the rows which saw the maximum addition.

1. 10,800 CE added 118,527 volume to OI making the OI balloon to 2,182,500 – this means call writers
are reasonably confident that Nifty will have a very tough time crossing 10,800.
2. 10,900 CE added 745,800 volume, ballooning the OI to 2,207, 850 – this means call writers are
reasonably confident that Nifty will also have a very tough time crossing 10,900.
3. The call writers also felt that crossing 11,000 CE is another tough call judging from the fact that 92,110
volume was added to OI taking it to 3,782,625. The change in OI was highest at 11,000 indicating that
writers were supremely confident that it was almost impossible for the Nifty to cross 11,000.

As of today, the call writers feel that Nifty will face it extremely tough to cross 10,800 and beyond, and
therefore are happily selling (writing) calls.

It may be that this position gets reversed tomorrow (for example, oil can drop $5, or government can
announce a PSU divestment program, etc.). If the position gets reversed, these call writers will get trapped
and will have to cover their shorts.

If it comes to covering their shorts, Nifty has the capability of shooting beyond 11,200 purely based on short
covering.

Step 5: Interpret The OTM Put Writing

I’ve highlighted the rows which saw the maximum addition.

1. 10,600 PE added 97,667 volume taking OI to 3,473,925. This is the highest OI on the Put side and it
implies that Put writers are more or less confident that Nifty will not crack 10,600. Note that there was a

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spurt in OI added, which implies that sellers are very confident not breaking 10,600.
2. 10,700 PE added 90,592 volume taking OI to 2,153,625. It implies that Put writers are more or less
confident that Nifty will not crack 10,650. The addition to OI at this Put Strike price was 894,900,
which shows the confidence of the Put writers.

As of today, put writers feel that Nifty will face it extremely tough to break 10,600 and below, and therefore
are happily selling (writing) puts between 10600-10700.

It may be that this position gets reversed tomorrow (for example, Shiv Sena and JDU can ditch the BJP, or oil
can rise $5/barrel, etc.). If the position gets reversed, these put writers will get trapped and will have to cover
their shorts.

If it comes to covering their shorts, Nifty has the capability of falling below 10,600 and possibly up to 10,200
which represents the next confidence level of the put writers.

Step 6: Checking the position on the Charts

Please read this article before reading the analysis.

a. The 1 Week Charts of the Nifty at 2.58 PM

Though Supertrend suggests a weak trend, you can see that the Nifty is very close to breaking the Supertrend
barrier.

The Nifty also hasn’t broken the Ichimoku Base and Conversion Lines.

The 20Day EMA is still higher than the 50-day EMA.

The MACD Line has crossed above the Signal Line and that is another bullish signal.

Therefore I would say the weekly chart is bullish.

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b. The 1 Day Charts of the Nifty at 2.58 PM

Super trend is bearish but the Nifty can easily breakout on a gap up opening, or a reasonable rise during a
trading day.

The Nifty is still above the Ichimoku Base and Conversion Lines.

The MACD suggests a bullish signal.

The 20D EMA is above the 50D EMA.

It is easy to tell Nifty is an uptrend.

c. The 1 Hour Charts of the Nifty at 2.58 PM

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3 indicators (Supertrend, Ichimoku and EMAs) suggest an uptrend while the MACD seems weak, but has not
turned bearish.

Step 6: Reconciling Options OI with Charts

The Options OI for the 28 June 2018 expiry suggests that call and put writers estimate that the Nifty would
move in a range f 10600 to 10900.

Now let’s do one thing – let’s measure the total call and put writers in a (+) (-) 200 to 300 points range.

The Nifty is currently at 10696 (3.30 PM).

The total number of Put Writers between 10450-10700 are 8,948,550.

The total number of Call Writers between 10800-11000 are 8,392,050.

Put Writers exceed Call Writers and therefore the writers are more confident in selling OTM PEs.

So, the analysis is that the writers expect the market to be in the 10600-10900 range and the charts suggest
that the markets are more bullish than bearish.

Step 7: Deciding what to do

After analysis, I would buy an In-The-Money or At-The-Money CE for June Expiry and hold with a SL for
2-3 days.

Step 8: Anticipating The Change In Trend

This article was written on 1 June 2018 and the expiry is on 28 June. It is possible that the trend changes
quickly and therefore you should assume this trend is valid for 2-3 days.

You can try this strategy on any FNO stock. The chances of
success will be greater than that of failure, but you should
always work with stop losses.

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