Open Interest Analysis Workbook by Research Wings

Hi Reader,

The below mentioned analysis about derivatives traded in Indian Markets is being shared often for which surety about any write up present in any publications so here it is

NIFTY25JAN2017 on 02-Jan-17
Total Investments in Options in Crores: Rs.1417.95
Total Investments in Futures in Crores: Rs.13952.09
Support: Rs. 8004.05
Resistance: Rs. 8376.25
Call - Max OI Strike Price: Rs. 8200
Put - Max OI Strike Price: Rs. 8000
Average: Rs.8378.4
Max Pain I: Rs.8350
(IMP) Max Pain II: Rs.8150
Max Pain III: Rs.8150
Put Call Ratio: 1.19
Range: Rs.8162.35 - 8220.5
Settlement Price: Rs.8192.1
Possible Least Delta Pair I and Premium: Rs.8200 and Premium Rs. 229.3
Delta Neutral I Profit Range: Rs. 7970.7 - 8429.3
Possible Least Delta Pair II and Premium: Rs.8150 and Premium Rs. 237.55
Delta Neutral I Profit Range: Rs. 7912.45 - 8387.55
Buy NIFTY25Jan2017 near Rs. 7970.7 with stop loss below Rs. 7912.45 for target upto Rs. 8179.15/8408.45
Sell NIFTY25Jan2017 near Rs. 8387.55 with stop loss above Rs. 8429.3 for target upto Rs. 8179.15/7941.6                      

Total Investments in Options is the settlement value of all option for the underlying with the expiry mentioned in the contract. it is product of settlement value*open interest for the same contract.                      

Total Investments in Futures in Crores is the notional value of open interest for the contract. it is product of settlement value*open interest for the same contract                      

Support is a level below which most of put writer will start incurring losses for the series of the contract as per the Open Interest of the date considered for calculation                      

Support is the current settlement price of the underlying - weighted average settlement value of all puts open for the series                      

Resistance is a level above which most of call writer will start incurring losses for the series of the contract as per the Open Interest of the date considered for calculation                      

Resistance is the current settlement price of the underlying + weighted average settlement value of all calls open for the series                      

Average is a level which most optimal level for all the options writer                      

Average is the current settlement price of the underlying + weighted average settlement value of all puts and calls open for the series                      

This is quite easy to understand as it the strike price having highest concentration
Call - Max OI Strike Price: Rs. 8200
Put - Max OI Strike Price: Rs. 8000                      

Max Pain, stems from the Maximum Pain theory, which states that most traders who buy and hold options contracts until expiration will lose money.                      

There is no concrete method which can conclude that this is the level where maximum call and put buyers will lose. I try to calculate a strike price which will lead to maximum loss to the buyers. It can be done by calculation of pay off table for every strike price against one strike price and the one with the least value of settlement will be the max pain.                      
Max Pain I is based on Option Contracts Current Investment Value
Max Pain II is based on Option Contracts Current Intrinsic Value as on date
Max Pain III is based on Option Contracts Notional Value                      


Put Call Ratio is the ratio of open interest of puts divided by open interest of calls                      

Range is nothing but the range of the value of nifty based on various settlement values of the call and put against their corresponding strike price. why this is different for all strike price is because of the different implied volatility for every strike price.                      

Delta Neutral Strategy is very popular in Option Writers, now lets us understand what it is                      
A Delta-neutral strategy is a strategy by which you one make money without having to forecast the direction of the market. The delta of an option is the rate of c
hange in an option's price relative to a one-unit change in the price of the underlying asset.                      

Now going with the reading this is a strategy that allows the option writers to make money irrespective of moves in market.                      

What it is for us and why it makes sense to read this                      

See generally the delta of nearest strike price call and put to the futures price will be 0 why?                      

There is a concept of Perfectly Hedged Portfolio: which is buy stock buy put and sell call or sell stock sell put buy call of same strike price                      

So at nearest strike price delta of options tends to be near to +0.50 for call and -0.50 for put                      

Now when you long or short this you have delta neutral trade                      

Now here when we say delta neutral it is a strategy favored for writers who put more money than the buyers against margins                      

Assuming this anomaly, we can also see that the option writer has higher amount of chest money to invest in market.                      

Option writer will make profits only if markets stays within the volatility which he has wrote the options                      

Now what is volatility?                      

Volatility is simply square of standard deviation of the underlying                                              

There are two type of volatility one which underlying is having and other volatility is famously known as Implied Volatility which option buyer or seller create while buying or selling options at a specific price they want.                      

So Actual Volatility is different than that of actual volatility of the underlying and hence leading the option prices vary from strike to strike                      

now when one write options for delta neutral he makes profit only in a range and hence as a follower to them I assume market to stay in the range for option writer and hence I generate buy on bottom and sell on the top of the delta neutral profit range for nearest strike prices                      

you can also get this range by adding and subtracting monthly implied volatility+10%(assumed in India as risk free rate) but to make this easier I take the settlement price to get this nos. fast                      

This is the whole concept used to arrive at the overall working                      

This is how I have done all the calculations using excel.                      

I am sharing the excel right here
https://drive.google.com/open?id=0B_h_XSzIHsw_emZheC1pRndaeWs

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