Option Chain AnalysisChapter 1: Basics Refresher
1.1 What is an Option Chain?
An option chain (or option matrix) is a tabular display of all option contracts for a particular stock or index. It is split into two halves:
Left side → Call Options (CE)
Right side → Put Options (PE)
Middle → Strike Prices
For each strike, the chain shows data such as Open Interest (OI), Volume, Last Traded Price (LTP), Bid/Ask, Change in OI, and Implied Volatility (IV).
1.2 Why Do We Analyze It?
Option chain analysis provides traders with:
Market sentiment (bullish, bearish, or neutral).
Probable support and resistance levels.
Identification of fresh positions vs unwinding.
Volatility expectations.
Clues for strategy selection (directional or non-directional).
Chapter 2: Core Components in Option Chain Analysis
2.1 Open Interest (OI)
Represents outstanding contracts not yet squared off.
High OI at a strike → strong trader interest.
Change in OI indicates new positions or unwinding.
👉 Key use in analysis:
Highest Put OI → Likely support.
Highest Call OI → Likely resistance.
2.2 Volume
Shows contracts traded during the current session.
High Volume + Rising OI → New positions building up.
High Volume + Falling OI → Unwinding/covering.
2.3 Implied Volatility (IV)
Reflects expected volatility of the underlying.
High IV → Options expensive; suitable for option writing.
Low IV → Options cheaper; suitable for buying strategies.
2.4 Price (Premium) Movement
If premiums rise with OI → trend continuation.
If premiums fall with OI → trend weakening.
2.5 Put Call Ratio (PCR)
Formula: Total Put OI ÷ Total Call OI.
PCR > 1 → More puts → bullish bias.
PCR < 1 → More calls → bearish bias.
Chapter 3: Interpreting Option Chain Data
3.1 Support & Resistance Identification
Support: Strikes with highest Put OI (buyers willing to defend).
Resistance: Strikes with highest Call OI (sellers capping upside).
Example:
If NIFTY is at 20,000:
19,800 Put has highest OI → Support.
20,200 Call has highest OI → Resistance.
3.2 OI and Price Analysis
Price ↑ + OI ↑ → Long Build-up.
Price ↓ + OI ↑ → Short Build-up.
Price ↑ + OI ↓ → Short Covering.
Price ↓ + OI ↓ → Long Unwinding.
This is one of the most powerful interpretations for intraday and positional trading.
3.3 IV Analysis
Rising IV + Rising Premiums → Traders expect big moves.
Falling IV + Rising Premiums → Unusual demand-driven move.
Chapter 4: Techniques of Option Chain Analysis
4.1 Strike-Wise Analysis
Look at individual strikes for OI and volume changes.
Identify where traders are adding fresh bets.
4.2 ATM (At-the-Money) Analysis
ATM strikes reflect the most balanced and sensitive positions.
Changes in ATM OI provide clear sentiment direction.
4.3 OTM (Out-of-the-Money) Analysis
Helps identify speculation and event-based positioning.
Example: Traders buying far OTM Calls before results → Bullish bets.
4.4 PCR Interpretation
Overall PCR for market view.
Strike-wise PCR for specific zones.
Chapter 5: Option Chain Analysis for Strategies
5.1 Directional Strategies
Bullish sentiment → Buy Calls, Sell Puts, Bull Call Spread.
Bearish sentiment → Buy Puts, Sell Calls, Bear Put Spread.
5.2 Neutral / Range-Bound Strategies
If highest Put OI and Call OI are close → sideways view.
Strategies: Iron Condor, Short Straddle, Short Strangle.
5.3 Volatility-Based Strategies
High IV → Option writing (Iron Fly, Short Straddle).
Low IV → Option buying (Long Straddle, Long Strangle).
Chapter 6: Practical Example (NSE NIFTY)
Imagine NIFTY trading at 20,000.
Highest Put OI at 19,800 → Support.
Highest Call OI at 20,200 → Resistance.
PCR = 1.3 → Slightly bullish.
Interpretation:
NIFTY likely to trade between 19,800–20,200 for now.
Strategy: Iron Condor within the range.
Chapter 7: Institutional vs Retail Approach
Retail traders: Focus on LTP, volume, ATM strikes.
Institutions: Focus on OI buildup, hedging positions, volatility skew.
Market makers: Use Greeks + IV to balance exposures.
Chapter 8: Advanced Insights
8.1 Option Chain + Technical Analysis
Combining chart support/resistance with OI data makes levels stronger.
8.2 Option Chain Before Events
Earnings, Fed meetings, budget → OI shifts + IV spikes.
Typically, IV crashes after event (“IV crush”).
8.3 Skew Analysis
Sometimes far OTM puts have higher IV than calls → sign of bearish protection demand.
Chapter 9: Mistakes Traders Make
Blindly following “highest OI” without context.
Ignoring IV while analyzing premiums.
Trading illiquid strikes (low OI/volume).
Misinterpreting PCR extremes (can signal contrarian trades).
Over-relying on option chain without considering news/technical charts.
Chapter 10: Step-by-Step Guide for Beginners
Open NSE Option Chain for the underlying.
Note the spot price.
Identify ATM strike.
Look at highest Put OI (support).
Look at highest Call OI (resistance).
Check PCR for sentiment.
Track OI + Price changes intraday for direction.
Select a strategy (buy/sell options, spreads, or non-directional).
Chapter 11: Benefits of Option Chain Analysis
Provides real-time market sentiment.
Identifies key support/resistance zones.
Helps in strategy selection.
Useful for hedging positions.
Assists in intraday, swing, and positional trading.
Chapter 12: Limitations
Works best in liquid instruments (NIFTY, BANKNIFTY).
Can give false signals during low volume sessions.
Sudden news/events can override OI patterns.
Requires constant monitoring (dynamic data).
Conclusion
Option Chain Analysis is a trader’s X-ray machine—it reveals what the surface charts don’t show. By analyzing open interest, volume, IV, and PCR, traders can spot where the market is placing its bets. This helps identify support/resistance levels, predict short-term trends, and craft strategies suited for directional, range-bound, or volatile markets.
For beginners, the option chain may initially look complex. But with practice, patterns emerge, and it becomes one of the most reliable tools for decision-making. For professionals, it’s an indispensable part of daily trading.
In the end, option chain analysis is not just about numbers—it’s about reading the collective psychology of market participants and positioning oneself accordingly.
