How To Analyze Call and Put Writing and Predict Trends

how to analyze call and put writing

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

How to analyze options chain

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

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.

how to read option chain

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 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

how to chart check options OI

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.

nifty hourly charts for optionsb. The 1 Day Charts of the Nifty at 2.58 PM

how to extrapolate options OI on charts

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

nifty hourly charts for options

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.

 

49 Comments on "How To Analyze Call and Put Writing and Predict Trends"

  1. Sir, you are like a light house providing crucial direction and insights in the extremely complicated industry. Thanks a ton.

  2. Very clear and simple and useful

  3. Salute Sir!

  4. Hi Sunil, Your article is very informative Who are new to Option chain will also understand it easily. Thanks for sharing the same. I have doubt on point last line that how you concluded range between 10600-10900. Is it based on max put writer strike price (10600) to max call writer strike price (10900). Pls clarify the same if you find time.

  5. Hi Sunil, Your article is very informative Who are new to Option chain will also understand it easily. Thanks for sharing the same. I have doubt on point last line that how you concluded range between 10600-10900. Is it based on max put writer strike price (10600) to max call writer strike price (10900). Pls clarify the same if you find time.

  6. Sir, Thank you so much for a very useful and precise write up.I have a query – in some places you have considered volume and in some places you have considered change in OI.. which one we have to consider..?

    • sunil.tinani | June 1, 2018 at 2:27 pm | Reply

      A high addition to Put OI means sellers are confident that prices will not crack
      A high addition to call OI means sellers are confident that prices will not move beyond the strike price

      When addition to OI is negative it means writers are squaring up their positions

  7. Nagnath Salunke | June 1, 2018 at 3:49 pm | Reply

    Best information which I found till date. Thank you Sir for sharing your knowledge.

  8. Sir. .how to decide the stop loss ??

  9. Spreading knowledge without expecting anything in return is a noble work…nice explanation sir…after many years first time i get to know all these concept..thanks a lot

  10. Hi Sunil,
    Simple things said in very simple manner. Very easy to understand. Thanks for keeping simple. My query is on that you mentioned seller of call/put. But when you say OI & volume, there are voters of call/put as well. How do you differentiate between buyers & sellers based on OI & volume.

  11. Wanted to learn this for a long time.This article will definitely help in Interpreting oi data.Thanks sir

  12. Very nicely made to understand.

  13. It’s really helpful and easy to understand. Thank you so much for your great work.

  14. Sunil Jee

    Your step by step explanation is superb and give very good insight.

    Thx

  15. Very nicely made to understand. How to get your sharing knowledge on regular basis or whenever you posted.

  16. Dear sir,
    At put side, you do addition of 250 points oi, and at call, 300 points, is that we do every time for study

  17. Good explanation with simple steps. Thank you

  18. Please cover bank nifty also in your next write up.

  19. Bhagwan Dubey | June 2, 2018 at 4:38 pm | Reply

    Dear Mr. Sunil…

    Heart felt gratitude and many thanks for you knowledge sharing…

  20. Masood Akhtar | June 2, 2018 at 8:56 pm | Reply

    How enlightening. I always thought more call volume means bullish at that price.

  21. kaushal kishor | June 3, 2018 at 4:47 am | Reply

    what an explanation.thanks sir to share your precious knowlege to the beginner.it will very helpful for us.

  22. What does it mean when someone writes in the money PUTs or CALLs. Are these guys out of their mind? say 11000 PEs.. are they confident that NIFTY will cross 11000 and sustain above this threshold or they just want to eat away premiums (theta decay)

    • sunil.tinani | June 3, 2018 at 6:49 am | Reply

      The idea is to eat the premiums and no, they are not insane. They are cold and calculative and use tools to enter into trades.

  23. Suddharsan Dhanakoti Subbramaniyam | June 3, 2018 at 7:28 am | Reply

    Sir
    You are awesome… Great work.. Great mind…was breaking head when writers are more or less equal both side at different strike..adding up is great strategy.. This is an eye opener.. Atleast for me.. Thanks a lot sir..

  24. alekhya ghosh | June 3, 2018 at 8:05 am | Reply

    Excellent Sir —- very very informative.

  25. Sir you are knowledge bank for us.
    Thank you for doing this great work

  26. Nice article

  27. Sir, It clear all my doubts which was in to me for a very long time. An easy way of understanding, you made. Very much thanks to you.

  28. Can you explain how to decide which call/put to buy :
    Atm , otm or itm?

  29. Sir,
    at strike price 10,800 call option- bid qty is 600. Can we think total call option writer contracts are 600 in no.? Please share views.

    • It doesn’t work like this. You need to check changes in volume and price before judging. Perhaps the earlier quantity was 0 – then it can be assumed call writers are selling. If the earlier volume was 7500, then it can be assumed call writers are covering.

  30. Vinayak Vartak | August 27, 2018 at 5:33 am | Reply

    Sir,
    I have query !
    We analyze the numbers shown in NSE option chain data, but are all those numbers of option writers only or they are mixed i.e. buyers + sellers ?

  31. Hello Sunil,
    Great article ! But how can we be so confident that those numbers added in OI are from sellers (writer only), can’t they be from buyers are well (from both PUT and CALL side) ? Just assuming “mostly writers” (as per your previous comment can lead into confusions), if those numbers are from Buyers at CALL side, then it will indicate that people are sure it will cross that level. I think to conclude writers vs buyers we would need to account for change in premium price as well ( negative vs positive )
    Please correct me if I’m wrong, I am not an options ninja, still learning.

    Thanks,
    _P0W!

  32. Thanks for this.

    Please suggests a trading software for going these trading. Now i am zerodha user.

  33. Hello Sir, have a question. More volume in a particular strike price represents more Sellers in it right? Is this the same case for individual stocks as well or only for indices? Please clarify this for me sir

  34. you are grate sir. i just read your article. i lost money in option trading without knowing any knowledge. thank a lot sir.

  35. agnelo rodrigues | April 27, 2019 at 7:48 pm | Reply

    Thank You Sir for sharing your knowledge was just wondering and confused your article was helped me to understand better, appreciated your kindness

  36. Krishputhamber | May 8, 2019 at 3:26 pm | Reply

    Thanks, complicated issue explained so simply

  37. Sunil Sir,
    Very good article posted by you. Post more articles about how to use Change in Open interest for intraday trading. There is one error in your article in the OTM call analysis section 4, under heading 2undet 10900 calls , by mistake you have put the change in open interest number[745800], instead of volume number which is 91418. I am sure this is error due to finish the article at the earliest. As i have noticed it, it is my duty to point it to you. Once again thanking you for your article. I am visiting your web site for the first time and Surely go through all other posts written by you.

  38. Sandeep lagoo | July 31, 2019 at 3:47 am | Reply

    Nicely explained.
    Can u give some recommendations on daily basis,basesd on the ydays data available??

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