How to Analyse Intraday Open Interest Like a Pro?
How to Analyse Intraday Open Interest Like a Pro? – Option Chain Analysis for Intraday Trading
Option Chain Open Interest Data is a highly significant information and if you know how to analyse Option Chain and use it for intraday trading, it can give you a clear edge.
Let’s see in detail about the Significance of Intraday Open Interest Data.
Why option chain analysis is important?
85% of the money traded in stock market is involved in Option trading. This is where huge amount of money is flowing, hence it gives the better picture of the market. So it is very much important to analyze the option chain every now and then. There are various ways and tools to do this easily and effectively like www.OptionAnalytics.in but it can be done manually as well. So let’s try to understand the various data we get from Option Chain Analysis.
Let’s start with simple things like call and put build-ups and how to spot it:
What is Call build-up?
Call build-up indicates the resistance of a stock/index at a specific strike price due to the build-up of open interest. This is very critical data and can be used to identify the resistance areas of the stock or index.
How to identify call build-up in open interest data?
Focus on the OI & change in OI columns on the Call side of the option chain to find the call build-up areas, which indicates resistance of a stock. If the Call OI of a strike price is growing, it indicates, build-up is still happening, otherwise it indicates there is unwinding happening, which means the resistance is weakening.
What is put build-up?
Put build-up indicates the support of a stock/index at a specific strike price due to the build-up of open interest. This is very critical data and can be used to identify the Support Areas of the stock or index.
How to identify put build-up in open interest data?
Focus on the OI & change in OI columns on the Put side of the option chain to find the put build-up areas, which indicates support of a stock. If the Put OI of a strike price is growing, it indicates, build-up is still happening, otherwise it indicates there is unwinding happening, which means the Support is weakening.
What is MaxPain?
Max Pain is the price at which the stock would cause financial losses for the largest number of option buyers at expiration. This is one of the most critical data feed for any option trader. Any trader who trades in option should be aware of this as this is the point at which the stock or index will close at the end of every expiry 95% of the time.
How to use MaxPain data?
Max pain theory says that the option writers will hedge the contracts they have written. So option writers will try to buy or sell shares of stock to drive the price toward a closing price that is profitable for them, or at least to hedge their payouts to option holders.
So we can predict where a stock price will close on expiry day using MaxPain.
What is PCR?
PCR denotes Put Call Ratio. As name indicates, it is the ratio of put and call open interest. PCR can be used to identify the current mood of the market. There are 2 sets of PCRs – Overall PCR and Intraday PCR.
How to use PCR?
If the ratio is higher than 1, it suggests traders are buying more Puts than Calls. Since lot of puts are being written, it indicates market is bottoming out.
What is the significance of PCR at Strike?
Instead of calculating PCR for overall OI data, we can calculate PCR for a specific strike price to find the significance of a specific strike price.
To know how to use these elements while trading, watch our video:
Please feel free to ask if you have any queries.
2 Responses
In Intraday Trade, we are told that one should focus only on Change in OI and Change in premium data.
Also, we are told that for Intraday Trade, one should take into account only a couple of ITM & OTM strike prices (i.e. 2 above and 2 below ATM price) change in OI data & calculation of PCR. Is this theory correct?
Kindly explain.
It is the right approach, but should definitely have an eye on strikes with highest OI as they form the huge resistance and support.