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OPTION PRICE ACTION AROUND SUPPORT & RESISTANCE ZONE

BIJAY SHARMA/DEEPAK MUKHIJA

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SUPPORT & RESISTANCE DEFINED

SUPPORT
Support is a price level where a downtrend can be expected to
pause due to increased demand or buying interest. As the
price keeps falling, the demand and related interest in the
security increases. This zone is often known as ‘SUPPORT
ZONE’.

RESISTANCE
Resistance is a price level where an uptrend can be expected
to pause due to increased supply of the underlying. As the
price keeps rising, the supply of the security increases. This
zone is often known as ‘RESISTANCE ZONE’.

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IDENTIFICATION OF SUPPORT & RESISTANCE (S&R)

There are various methods to identify the Support Zone and Resistance Zone. These can be price based, trendline
based, Moving Average based or other.

In this document we will use the Option Prices to identify the S&R levels.
❖ The idea of this exercise is to explain the importance of Option Prices on Banknifty and its moves.
❖ We observe important monthly ITM strike valued around 1000 points from the start and end of the series and identify the S&R for its price to
avoid wrong entry in trades.
❖ Our market is driven by Writers (Option Sellers) and we assume that someone selling ₹1000 option is ‘smart money’ having knowledge and
resources to handle moves on both sides majority of time.
❖ This is not a holy grail but it will reduce wrong trades during false breakouts / breakdowns and if the view goes wrong then exit with a smaller
Stop Loss.
❖ In this example we will take Banknifty 35000CE and 36000PE options for our study during the period of 25th June 2021 and 16th July 2021.

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Banknifty 35000CE on 15 minute time frame from 25/6/21 to

16/7/21
HIGH = ₹ 1229 | LOW = ₹ 559

Banknifty 35000CE on 15 minute time frame from 25/6/21 to 16/7/21

 HIGH = ₹ 1229 | LOW = ₹ 559

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As you can see in the chart, this call has a resistance zone around ₹ 1190 - ₹ 1230 levels and whenever the
price reaches around ₹ 1200/- , the option price reverses. The effect of this is that Banknifty also faces
Resistance at this time and reverses. Refer to the data summary and chart below:

DATE TIME HIGH PRICE DATE TIME LOW PRICE

25/6/21 14:00:00 1199.00 25/6/21 15:15:00 1050.00
28/6/21 09:15:00 1205.00 02/7/21 09:15:00 560.00
06/7/21 13:45:00 1225.00 07/7/21 09:15:00 922.00
08/7/21 09:15:00 1201.00 09/7/21 09:45:00 612.00
15/7/21 11:30:00 1220.00 15/7/21 12:45:00 1100.00
16/7/21 09:15:00 1229.00 16/7/21 13:45:00 935.00

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Banknifty chart on 15 minute time frame from 25/6/21 to 16/7/21

HIGH : ₹ 36075 | LOW : ₹ 34980

Banknifty chart on 15 minute time frame from 25/6/21 to 16/7/21

 HIGH : ₹ 36075 | LOW : ₹ 34980

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Lets compare the 2 charts side by side and find out how they behave together

Banknifty Chart Banknifty 35000CE Chart

• The lowest level on banknifty was 35665 on 25/6/21 when this call hit ₹ 1200.
• The highest level on banknifty was 36075 on 16/7/21 when this call traded around ₹ 1200.
• So even when the banknifty ran 400 points in 20 days approx, this call is stuck at the same level.

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Now let us see the corresponding Banknifty levels when 35500ce is making high and low as per below given
table .

DATE TIME HIGH PRICE DATE TIME LOW PRICE

25/6/21 14:00:00 35665.00 25/6/21 15:15:00 35425.00
28/6/21 09:15:00 35990.00 02/7/21 09:15:00 34970.00
06/7/21 13:45:00 35894.00 07/7/21 09:15:00 35470.00
08/7/21 09:15:00 35945.00 09/7/21 09:45:00 34980.00
15/7/21 11:30:00 36020.00 15/7/21 12:45:00 35891.00
16/7/21 09:15:00 36075.00 16/7/21 13:45:00 35737.00

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Now let us see if the same logic is working on ITM PE also trading around ₹ 1000 at the start of the series.
So we choose 36000 PE of July expiry and plot the prices at same time stamps .

DATE TIME LOW PRICE DATE TIME HIGH PRICE

25/6/21 14:00:00 960.00 25/6/21 15:15:00 1082.00
28/6/21 09:15:00 875.00 02/7/21 09:15:00 1445.00
06/7/21 13:45:00 670.00 07/7/21 09:15:00 898.00
08/7/21 09:15:00 609.00 09/7/21 09:45:00 1240.00
15/7/21 11:30:00 460.00 15/7/21 12:45:00 532.00
16/7/21 09:15:00 458.00 16/7/21 13:45:00 575.00

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Here you can observe the following:

 During the first week of expiry, when the price of 36000PE was falling to ₹900 levels, it was acting as a support. This is
highlighted in the chart in the previous slide.
 This support level shifted down to ₹600 levels during the second week of expiry.
 Now in the third week of expiry, this support zone has further come down to ₹450 levels.

The reason for this downward shift in PE prices is that Banknifty is in an upward trending direction and Theta decay is
setting in here.

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THANK YOU

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