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Institutional Option Trading Part -6Institutional trading and investing significantly differ from retail activities. Institutions trade in large volumes, use complex strategies, and have access to exclusive information and tools. This guide will provide a comprehensive overview of institutional option trading, investing, and general trading practices, detailing their methodologies, tools, and market impacts. Understanding Institutional Investors Institutional investors include mutual funds, hedge funds, pension funds, insurance companies, and large banks. These entities manage vast sums of money, often on behalf of others, and possess substantial market influence. Key Characteristics: Large Capital Base: Institutions trade in millions or billions. Market Influence: Their trades can impact prices significantly. Professional Resources: Access to cutting-edge research, proprietary algorithms, and high-speed trading platforms.
NSE:BANKNIFTYEducation
by SkyTradingZone
2
Put Call Ratio (PCR) Explained in Simple TermsWhat is PCR? The Put-Call Ratio (PCR) is a popular market sentiment indicator used in option trading. It helps traders understand whether more people are buying put options (bearish bets) or call options (bullish bets) at a given time. Put Options: Contracts betting the price will go down. Call Options: Contracts betting the price will go up. How to Read PCR? PCR < 1: More call options → Bullish sentiment. PCR > 1: More put options → Bearish sentiment. PCR = 1: Neutral sentiment. But extreme values often suggest the opposite: Very High PCR: Possible market reversal upwards (too many bearish bets). Very Low PCR: Possible market reversal downwards (too many bullish bets). Example: Put OI: 5,00,000 contracts Call OI: 10,00,000 contracts PCR = 5,00,000 / 10,00,000 = 0.5 → This indicates bullish sentiment. Why PCR Matters? Helps identify market mood (bullish or bearish). Gives contrarian signals (overcrowded trades can reverse). Used in option trading strategies for timing entry and exit.
NSE:BANKNIFTYEducation
by SkyTradingZone
3
Learn Institutional Trading Pros and Cons Pros: Early signals, useful for reversals. Cons: Requires confirmation, may produce false signals. Technical Trading What is Technical Trading? Technical trading focuses on using historical price data, volume, and technical indicators to predict future price movements. Traders use charts and patterns instead of company fundamentals. Key Tools in Technical Trading Price Charts: Candlestick, line, bar charts. Indicators: Moving averages, RSI, MACD, Bollinger Bands. Chart Patterns: Head and Shoulders, Triangles, Double Tops, Flags. Support and Resistance Levels: Key price points where stocks reverse.
MCX:CRUDEOIL1!Education
by SkyTradingZone
1
Learn Institutional Trading Part-10What is Divergence? Divergence occurs when the price of a stock and an indicator (like RSI, MACD, or momentum indicators) move in opposite directions. It is often considered a warning that the current trend may be losing strength. Types of Divergence Regular Divergence: Indicates potential trend reversal. Example: Price makes a new high, but RSI makes a lower high. Hidden Divergence: Indicates trend continuation. Example: Price makes a higher low, but RSI makes a lower low. How to Use Divergence Combine with support and resistance levels. Confirm with volume and candlestick patte
MCX:GOLD1!Education
by SkyTradingZone
1
Learn Institutional Option Trading Part-4Recent Growth of Options in India: Retail participation has surged. Weekly expiry options (especially on Bank Nifty) have become extremely popular. SEBI introduced lot size and margin regulations to control excessive speculation. Investing in India What is Investing? Investing means allocating money into assets like stocks, mutual funds, bonds, gold, or real estate to earn returns over time. Major Investment Options in India: Equities (Shares) Mutual Funds Fixed Deposits Public Provident Fund (PPF) Gold (Physical and Digital) Real Estate Bonds and Debentures
NSE:HDFCBANKEducation
by SkyTradingZone
5
Learn Institutional Option Trading Part-3In India, options are traded primarily on: NSE (National Stock Exchange) BSE (Bombay Stock Exchange) The Securities and Exchange Board of India (SEBI) regulates the derivatives market and ensures fair practices. Why is Option Trading Popular in India? Leverage: Traders can control large positions with small capital. Hedging: Investors use options to protect their portfolios from market fluctuations. Income Generation: Strategies like covered calls can provide regular income. Speculation: Traders can bet on price movements with limited risk.
OANDA:BTCUSDEducation
by SkyTradingZone
6
Institutions Option Database Trading Part-6Deep Dive into Options Basics (For Data Traders) Options are contracts giving the right but not the obligation to buy or sell an asset at a certain price before a set date. They are used for hedging, speculation, and generating income. 🛠️ Two Types: Call Option: Right to buy an asset. Put Option: Right to sell an asset. Backtesting means testing a strategy using past data to check performance. Key for data-driven option trading. Example: Load 1-year option chain data for BANKNIFTY. Apply rules: Buy Call when IV drops by 10% & PCR < 0.8. Check PnL for each trade. Filter for success rate > 65%.
MCX:CRUDEOIL1!Education
by SkyTradingZone
Institutions Option Database TradingDatabase Option Trading is a powerful blend of market logic and data science. With structured data, intelligent scanning, and strategic execution, traders gain a massive edge over emotional/manual decisions. This approach is ideal for traders aiming for consistent performance, lower drawdowns, and systematic growth. The more you code, automate, and analyze—the better you trade. Sample Strategy - PCR + OI Spike Strategy Logic: If PCR > 1.3 and Call OI Spike at ATM > 15%, initiate a Put Sell. Exit when PCR drops below 1.1 or OI unwinds. Backtest Results (NIFTY Options): Win Rate: 72% Avg Profit per Trade: ₹4800 Max Drawdown: ₹9800
NSE:HDFCBANKEducation
by SkyTradingZone
2
Long Term Database TradingHow Institutions Use Option Databases 🔍 Institutional Insights: Banks & HFTs (High-Frequency Traders) run option strategies over petabytes of data. Real-time arbitrage opportunities are found using option databases. They model Vega, Theta & IV impact per stock and expiry. Example Institutional Workflow: Pull 10 years of NIFTY options. Train ML model to predict next-day IV. Execute based on high-probability straddles/strangles. Exit before expiry using trailing delta hedge.
NSE:NIFTYEducation
by SkyTradingZone
3
Database Trading Introduction to Database Option Trading Database Option Trading is an advanced strategy where traders use massive historical and real-time market data stored in structured databases to identify profitable option trades. Unlike conventional trading, this approach focuses on data-driven decision-making—leveraging algorithms, statistics, and pattern recognition rather than pure technical/fundamental analysis. 2. The Role of Data in Option Trading Types of Data Used: Option Chain Data: Strike prices, premiums, LTP, OI, IV, volume. Historical Data: Past price action, volatility, Greeks, PCR. Sentiment Data: FII/DII positions, news sentiment. Real-Time Market Feeds: Tick-by-tick updates. Macroeconomic Data: Interest rates, inflation, events.
NSE:BANKNIFTYEducation
by SkyTradingZone
1
Learn Institution Trading What is Institutional Option Trading? It refers to large-scale option strategies used by hedge funds, banks, and FIIs to manage risk, hedge portfolios, or create directional bets with high precision. 🔹 Key Institutional Strategies: Buy-Write (Covered Call): Holding stocks and selling calls to earn premium. Protective Put: Buying puts as insurance to hedge stock positions. Multi-leg Spreads (Iron Condor, Butterfly): Neutral strategies to profit from range-bound markets. Put-Call Ratio Analysis (PCR): Gauging market sentiment from institutional flow.
BSE:SENSEXEducation
by SkyTradingZone
7
Advanced Divergence Trading What is Divergence? Divergence happens when the price moves in the opposite direction of an indicator (like RSI, MACD, or Momentum). It signals a possible trend reversal or trend weakening. 🔹 Types of Divergence: Regular Divergence (Trend Reversal): Bullish: Price makes lower lows, but indicator makes higher lows → Reversal up Bearish: Price makes higher highs, but indicator makes lower highs → Reversal down Hidden Divergence (Trend Continuation): Bullish: Price makes higher lows, indicator makes lower lows → Trend continuation up Bearish: Price makes lower highs, indicator makes higher highs → Trend continuation down 🔹 Advanced Tips: Use on higher timeframes for accuracy Confirm with volume, trendlines, or price action Combine with support/resistance or Fibonacci zones 🔹 Pro Tools to Use: RSI (Relative Strength Index) MACD (Moving Average Convergence Divergence) Stochastic Oscillator OBV (On Balance Volume)
NSE:NIFTYEducation
by SkyTradingZone
6
Support and Resistance Support Level: A price level where demand is strong enough to prevent the price from falling further. It's like a floor—buyers enter here expecting prices to rise. Example: If Nifty falls to 22,000 repeatedly and bounces back, 22,000 becomes a support level. 🔹 Resistance Level: A price level where selling pressure overcomes buying, preventing prices from rising. It's like a ceiling—sellers dominate at this level. Example: If Bank Nifty rises to 50,000 but fails to move above, 50,000 is resistance. 📊 How to Identify Them: Historical price charts Trendlines Moving averages Fibonacci levels Volume analysis 📈 Use in Trading: Buy near support Sell near resistance Use breakout strategy when price breaches either level
NSE:HDFCBANKEducation
by SkyTradingZone
4
Advanced Institutions Option Trading - Part 10Option Pricing Models Institutions rely on theoretical models to value options precisely. Models Used: Black-Scholes Model: Most common for European Options Binomial Model: For American options Monte Carlo Simulations: For complex path-dependent options Bachelier Model: For negative rate scenarios These models help forecast fair value, hedge ratios, and profit probabilities. 🔹 17. Algorithmic and Quant Option Trading Institutional desks often use automation for efficiency. Tools & Techniques: Python, R, C++ for strategy coding Machine Learning for volatility prediction Option Flow Analysis (Unusual Orders) Real-time Gamma Exposure Mapping Quant desks track Volga, Vanna, Charm, and other second-order Greeks for precise hedging.
MCX:GOLD1!Education
by SkyTradingZone
4
Advanced Institutions Option Trading - Part 8Institutional Option Trading Strategies Let’s dive deeper into how big players operate: 🔶 Volatility Arbitrage: Take advantage of IV mispricing across strikes/months. Long low IV, short high IV – Net neutral delta. 🔶 Dispersion Trading: Buy individual stock options, short index options. Profit from correlation divergence. 🔶 Box Spread (Synthetic Arbitrage): Arbitrage between synthetic long/short positions. Very low risk, used by HFT desks. Institutions use algorithms to run thousands of such strategies in real time.
MCX:CRUDEOIL1!Education
by SkyTradingZone
2
Advanced Institutions Option Trading - Part 4 Technical and Fundamental Analysis in Option Trading Fundamental Analysis: Evaluate company value, earnings, sector performance Technical Analysis: Price action, patterns, indicators like RSI, MACD IV & HV Tools: Helps in choosing optimal strike prices based on volatility Understanding market structure is essential for timing entries/exits in options. Advanced Institutional Options Trading Institutions like hedge funds, banks, and proprietary desks use options for complex strategies: Delta Hedging: Maintain a neutral position Portfolio Insurance: Using puts during economic downturns Volatility Arbitrage: Capitalizing on volatility mispricing Structured Products: Combine options with bonds or equities for customized payoff These strategies require deep understanding of volatility surfaces, risk models, and massive capital.
NSE:NIFTYEducation
by SkyTradingZone
2
Advanced Institutions Option TradingFinancial Market is a marketplace where assets such as stocks, bonds, commodities, and derivatives (like options) are bought and sold. Key components: Equity Markets – Shares of companies Debt Markets – Government or corporate bonds Derivatives Market – Futures, Options Currency and Commodity Markets Options are financial contracts giving the buyer the right (not obligation) to buy/sell an asset at a set price before a specific date. ✅ Types of Options: Call Option: Right to Buy Put Option: Right to Sell ✅ Key Terminologies: Strike Price: Agreed price to buy/sell Premium: Cost of the option Expiration Date: Validity of the contract ITM/ATM/OTM: In-the-money / At-the-money / Out-of-the-money
NSE:BANKNIFTYEducation
by SkyTradingZone
2
Advanced Put Call Ratio (PCR)Slide 1: Introduction to Advanced Put Call Ratio (PCR) The Put Call Ratio (PCR) is a widely used sentiment indicator in options trading. It measures the volume or open interest of put options relative to call options. Advanced analysis of PCR helps traders gauge market sentiment—whether fear or greed is dominant—and anticipate potential reversals or continuations. Slide 2: Basic Formula and Types PCR Formula: Volume-based PCR = Total Put Volume / Total Call Volume Open Interest-based PCR = Total Put OI / Total Call OI Interpretation: PCR > 1: Bearish sentiment (more puts) PCR < 1: Bullish sentiment (more calls) Key Types: Index PCR – NIFTY, BANKNIFTY PCR Stock PCR – For individual stocks Slide 3: Advanced Interpretation of PCR 1. Contrarian Indicator: Very high PCR (e.g., >1.5): Indicates excess fear, potential reversal upward Very low PCR (e.g., <0.6): Indicates extreme optimism, potential market correction 2. Trend Confirmation: Stable rising PCR in uptrend = Confirmed strength Falling PCR in downtrend = Confirmed weakness 3. Divergence Signal: If prices rise but PCR also rises → underlying caution (hidden bearishness) If prices fall but PCR drops → lack of fear (hidden bullishness) Slide 4: Using PCR with Other Tools Combine PCR with: Volume & OI Data – To confirm trader positions Implied Volatility (IV) – High PCR + high IV = fear-based overreaction Support/Resistance Levels – Look for breakout confirmations Technical Indicators – RSI, MACD, VWAP with PCR for enhanced edge
NSE:HDFCBANKEducation
by SkyTradingZone
2
Option Trading Master class Part -6What is Option Trading? Definition: Options are derivative contracts that give the holder the right, but not the obligation, to buy or sell an asset at a pre-decided price within a specific timeframe. Types of Options: Call Option: Right to buy Put Option: Right to sell Option Participants: Buyers (Holders): Limited risk, unlimited reward Sellers (Writers): Limited reward, unlimited risk How Options Work (With Example) Imagine Reliance stock is trading at ₹2,500. Call Buyer: Buys a ₹2,500 Call Option by paying ₹50 premium Scenario A (Stock goes to ₹2,600): Intrinsic value = ₹100 Profit = ₹100 – ₹50 = ₹50 per share Scenario B (Stock goes to ₹2,400): Option expires worthless Loss = ₹50 (premium paid)
NSE:NIFTYEducation
by SkyTradingZone
2
Option Trading Master class Part -7Fundamentals of Stock Investing Types of Investors: Value Investors: Focus on undervalued companies Growth Investors: Target high-growth potential stocks Dividend Investors: Prefer regular income from dividends Research Parameters: Earnings per Share (EPS) Price-to-Earnings Ratio (P/E) Return on Equity (ROE) Debt-to-Equity Ratio Industry Trends Tools for Investing: Demat and Trading Account Research Platforms (e.g., TradingView, Screener.in) Portfolio Tracker (e.g., Zerodha Console)
BSE:SENSEXEducation
by SkyTradingZone
2