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How to read option data for trading option, future and cash

Options are famous for its non-linear pay-offs and limited risk and unlimited profit for buyers. While trading option, it is important to select the strike price or various combination of them, also it is equally important to realise the utility of the options as well as reading and understanding the trade data.

Options types, Time to expire, Strike price and underlying values are standard variables that intensify an option premium that keep changing. Apart from these, Option Greeks (namely Delta, Gamma, Theta and Vega) are the advance instruments that every option traders mind for, tracks the fraction of changes in other variables and reflects that in the premium.

Delta records the directional changes. Gamma accelerates the Delta. Theta corresponds the time value while Vega records the variation in Volatility and its effects on Premium.
The variations into these instruments data, give great insights of the market sentiments and open a new window of trade improvisation.
Indeed analysing data for trade is something like jumping into the ocean - a vast subject in itself that makes impossible to discuss entire data analytics over here in one go. However; we will discuss here the most import data analytics that actually works in today’s volatile scenario of the market.
Implied Volatility
If you check option chain of the Nifty, you will find the option premiums are very high. Even OTM options behave like an ATM in terms of Premium at least. What makes OTMs to trade expensive?

Anywhere you record, a significant change in premium without a respective change in the underlying price and expiry can be credited to change in Implied Volatility.
Expensiveness in option premium is a result of high Volatility. Generally, high volatility is recorded before any event such as election results, Companies’ earnings, or RBI Monetary Policy meetings and once these events passed by, the volatility starts cooling off so as the premiums.
However, our current market scenario, we have the highest Volatility and this highest volatility is due to the uncertainty in the market caused by the Corona Virus.
Underlying Value, Strike Price, Time to expiry and Risk-free rate - these are the four variables needed to calculate implied volatility apart from premiums. As discussed higher premiums are credited to higher implied volatility and lower premiums are attributed to lower implied volatility.
Calculating and reading implied volatility for various stocks can be a cumbersome work thus we have an index that reflects the current volatility in the market. For Indian market we have India VIX. Implied Volatility is known for mean-reverting nature and inversely correlated to the underlying price.
Importance of Implied Volatility Analytics
As Volatility is co-related to underlying inversely, it can give a good signal of the top and bottom of a stock or an index. One can predict, index bottom if it coincides with high volatility and vice-versa. we see Implied Volatility at recent high while the index has been falling to fresh lows
India Vix is above 60 and Nifty is below 9000. If anyone curious about when the bottom will come in a current sell-off, he must keep eyes on cooling off of the VIX. Once it starts cooling, can be the first signal of the bottom creation in the nifty now.
Once it starts cooling, can be the first signal of the bottom creation in the nifty now.
Option Interest Analytics
Open Interest is easily available at NSE website and option chains. If you go through option chains, you will find the distribution of Open Interest across various strikes. Look for the highest call open Interest strike higher than current market price and lowest put open interest strike lower than the current Market Price.

Trading Range: Trading range could be between the highest call strike and highest put strike.
Highest resistance: Generally, heaviest call open interest works as the highest resistance for the index.

Highest Support: Generally, heaviest put open interest works as the highest support for the index.

Pivot Strike: It is the strike where bulls and bears have almost equal interest. Tug of wars go around this strike.

In case a stock moves either side of trading range can give a significant move, thus a call strike is broken there could be a serious up move and vice versa can be seen.
These analytics are just a few drops in the ocean of vast data yet effective. It can give a good return if one combines it with his existing trading techniques. These data are for options however it also helps you in normal trading like cash as well as Future.
Do you use data analytics for your trading? Write us into the comment box.

Highly recommended to learn these topic before delving into option data analytics.

How to read option data for trading option, future and cash Reviewed by Kumar Chandan on March 17, 2020 Rating: 5

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