Option Chain Tutorial

Here is the demo Video of Sensibull Option Chain plus a tutorial on how to use Options Chain, OI, Max Pain, PCR, and IV Percentile.

The Sensibull Option Chain shows the following in an easy to read format

  1. Open Interest Build up across strikes in call and put options on Nifty Option Chain, Bank Nifty Option Chain, and Single Stock Option Chain
  2. Put Call Ratio, Implied Volatility, Implied Volatility Percentile, and Max Pain of Nifty, Bank Nifty and Single Stock Options
  3. Option Greeks — Delta, Vega, Theta of Nifty Bank Nifty and Single Stock Options

However, here are a few words of caution:

Do not trade based on these numbers only. All these numbers, including IV, have no meaning in illiquid options and can show wrong values. Please do not trade illiquid options. Nifty, Bank Nifty, and top 10 stocks are reliably liquid, and the next 40 are somewhat liquid. Liquidity and reliability drop after this point. Therefore, all these numbers may work only for Nifty, Bank Nifty, and the top stocks in the current expiry.

PCR, Max Pain and IV Percentile do not have high predictive power. They have meaning only if backed by high OI and high volumes.They work only in the current expiry, after the first five days or so. They might not work in single stocks without much volume or OI. Do not trade ONLY based on these numbers. Use these in combination with other indicators.

OPEN INTEREST (OI)

Option sellers are big institutions, option buyers are small. Big guys are usually right. A build-up in Calls usually means big people are selling Calls, and are betting the market won’t go up. A build-up in Puts means big people are selling Puts, and are betting the market won’t go down. So a strike with huge call OI will be a resistance, and a strike with huge Put OI will be a support.

PUT-CALL RATIO (PCR)

High PCR (> 1) means the puts are more in number than calls. This means the option sellers are comfortable selling puts more than selling calls. This is a bullish sign. Having said that, an extremely high PCR, usually 1.3+ might mean an overbought stock and may result in bearish reversal

Low PCR (< 0.5) means the puts are less in number than calls. This means the option sellers are comfortable selling calls more than selling puts. This is a bearish sign. Having said that, an extremely low PCR, usually around 0.3 might mean an oversold stock and may result in bullish reversal

MAX PAIN

Max pain theory says a stock has a high chance of expiring at a point where the option sellers will have the least loss and buyers have the maximum loss. This theory, though not proven, is used by traders. Max Pain data for singles stocks is unreliable, especially if there are no puts or no calls in the given expiry.

IV PERCENTILE (IVP)

IVP measures how high the IV of a stock is. It takes the ATM IVs of a stock for the last 250 days and compares the current IV with those historical IVs. It then tells how many days in the 250 has the IV been less than the current IV. If IVP = 90%, it means the current IV is more than 90% of the daily IVs in the same stock. This means it is a high IV for that stock. Similarly, a low number indicates a relatively low IV.

We do not show IV Rank because IVP is way more reliable than IV Rank. If there are one or two extremely high IV values, then all the other IVs will show a low IV rank, which is misleading. IV percentile does not suffer from this problem. See more here

IV Percentile can be misleading on Fridays, and sometimes on Thursdays due to option selling near weekends. This happens only in the last two weekends before expiry and happens more on the last weekend before expiry.

IVP does not have significance on the expiry week. This is because movement can cause the IVs to spike up a lot in the last three days of expiry. Also, the options have low Vega, which means minor changes in IV should not be looked at as an opportunity to sell. Expiry Week option selling is a Theta and Delta game.

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