In an interesting session as a part of the highly popular Face2Face series, conducted by Elearnmarkets, Mr Vivek Bajaj, Co-founder of Elearnmarkets, invited Mr Abhijit Phatak a successful stock market investor with 20 years of experience, to decode Trading Strategy using Options Open Interest.
Mr Abhijit Phatak has developed a unique method of identifying what the market is up to based on charts of Options and straddles, OI of options, and Put-Call ratio at various strike prices. He has also observed how options charts have a different story to tell, sometimes exactly opposite to what the chart of the underlying is showing.
The momentum of a trend in the indices can also be identified based on charts of a bunch of straddles. Almost all the techniques have been developed on his own by observing them over the years, and many of the techniques he uses are not found in any technical analysis textbook.
In this blog, Mr Abhijit Phatak will talk about strategies using options open interest. But before starting the discussion, he gives a disclaimer to the options traders that risk management is very important. And also, the methods that he will be discussing will look easy but challenging to implement during the live market.
It is also necessary to have real time data while trading options in the market.
Let us discuss some terminologies before discussing trading strategies using open interest:
Few Terminologies for Options Trading
Since most novice options traders are buyers, they should pay attention to whether the market is in momentum or going sideways.
As the premium of the options constitutes two elements- intrinsic value and time value. The Out-of-Money options have a lot of time value, and In-the-Money options there is no time value.
So, momentum should be there in the market as no momentum acts as the biggest villain for the long options. Money in the long options can only be made if momentum is there in the market.
This is why most options traders are options sellers, as do not have to take care of time or momentum.
2 Charts Analysis
Above is the hourly chart of Nifty; we can see a double top around 16850; after that call also made a double bottom and then it started going up.
If the call is bearish, then the put must also be bearish. Selling puts means that the options traders are bullish, and in the put chart, we can see a hammer candlestick pattern. On the following day, the market opened gap down, and a double top pattern is formed.
So, we can see an overall bullish formation pattern in the put charts.
The above is the call options chart of Nifty, and we can see a double bottom formation in the charts indicating a bullish reversal.
Buying call options means that options traders are bullish, as seen in the two charts above. Then it comes to managing risk. If the stop-loss is affordable, we can take the trade and put a trailing stop-loss.
Options Open Interest in Options Trading
According to Mr Abhijit Phatak, the options traders must check the open interest of both puts and calls options as we reviewed the charts above of both puts and options.
The open interest of puts, which indicates writing by the bulls, is like building a base or foundation of a building and the open interest of calls indicating bearishness is mostly by smart money.
One should track the put-call ratio to track the dynamic level of the market. The put-call ratio below .80 is bearish, between .8-.12 is neutral and above .12 is bullish for every strike price.
You can also join our course on Certification in Online Options Strategies
The broad view comes if you see the total, i.e., if the market is bearish or bullish. The individual strike prices show the market’s actual support or resistance level.
One should note that one needs to trade on the price and not open interest.
You can watch the entire video here
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