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How to detect Option buyers and Seller on Option Chain

The data available on Option Chain seems complex and strange for a beginner in the option trading and it is obvious for them as sometimes these data look like a complex chain of some random numbers for the experienced traders as well. The option chain is a solid topic of discussion among the option traders. Among all the questions that are being asked, how to detect Option Buyers and Sellers on Option chain is the hottest one. The question is nothing less than a puzzle.

Having knowledge about the buyers and sellers can help an option seller minimizing his loss and maximize profit. It also timely acknowledge him for doing any type of adjustment with his trades.


What is an Option Chain?

An Option chain is an important table, full of vital information about Volume, Open Interest, Change in Open Interest, Premium, Change in Premium etc for calls and puts for the various strikes of an Index or Stock. This information can help many for taking a profitable decision as well as help them to avoid the mistakes that option traders generally make.
When comes to the Option chain I believe Open Interest and Change in Open is the most vital information that conveys the sentiment of the market if you look it properly. Look the Image given below: 
Image Credit: Telegram Bot OIinaction

This image shows the OI positions in the Nifty that indicates the liquidity of the Nifty. And here the question arises, how one can differentiate sellers and buyers in the Option Interest.

For example, Nifty 9500 strike has 15 lakh call OI and 10 lakh Put OI. In 15 lakh call OI, how many of them are call sellers and buyers. Can we detect it?



Exactly, we cannot say how many buyers and sellers are over there. For convenient, I consider them as sellers as a big chunk of an OI is sellers only.

However, we can still differentiate what is going on buying or selling for a particular strike for a given period. Yes, this is possible if you combine Change Open interest data with Change in Premium.

When we combine OI with Price, basically, we get four trend cycles namely: Long, Short, Short Cover and Unwinding.

Open Interest and Price Relationship for an Option

Open Interest
Price
Remarks
Increasing
Increasing

  • Long Happening
  • Option Buying is going on
Increasing
Decreasing

  • Short Happening
  • Option Selling is going on
Decreasing
Increasing

  • Short Covering
  • People are covering their shorts on the particular strike.
Decreasing
Decreasing

  • Long Unwinding
  • People are closing their longs on the strike.



See the Option Chain of the Nifty,


Notice the OI change in Call side in the Box, these all are positive, so we can conclude the call buyers have the maximum chunk in the Open Interest. On the Other hands, If you look change in OI in the put side in the box and their respective change in price, you will find, change in OI is positive but the price is negative. We can conclude on those strikes put writing has a big chunk.

The Bottom Line
Apart from longs and shorts, you cannot capture the other two cycles with naked eyes or you need a deep observation in the variation of Open Interest with respect to the price. 
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How to detect Option buyers and Seller on Option Chain Reviewed by Kumar Chandan on May 30, 2020 Rating: 5

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