How Do Nifty Options Indicate Market Range?

by Vinaya HS on September 24, 2017

in Finance

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While most of the traders are well versed with how the Nifty options indicate market range but not everybody is aware of their value and significance as being the predictive tools.

Nifty options chain permits you to buy or sell Nifty options at a particular level in exchange for a price which is called as “premium” which you have to pay to the sellers. The options are of two types – the calls options and the puts option. One of the most dependable indicators of the Nifty future market direction is the put/call options volume ratio. If you track the daily and weekly volume of puts and calls, you will be able to know the feelings of traders. If you find there are too many put buyers, it usually indicates that a market slowdown is going to come while if you find that there are too many call buyers, it hints that market top is going to come.

When you are bullish on the market you buy a Nifty call option, and when the market is bearish, you should buy a put option. The seller of the call or put collects a premium from you, which is nothing but the option’s price. The buyers on the net basis can be either retail or the FII’s or foreign institutional investors. Option sellers are normally HNIs and prop desks of brokers. Options can be used as a hedging tool for one’s portfolio. For example, if you have a part of Nifty 50 stocks in your portfolio, you can buy a put option on Nifty.

If the Nifty goes down, your portfolio will come under the loss which will be at a level to be counterbalanced by the put option which increases in the value. Also, if you hold long Nifty futures which gets diminishing in its value, you can counterbalance your loss by becoming the net buyers of the index put options.

One can tell the market range through Nifty by looking at the open interest or OI on the option strikes or levels. The OI gives a very wide kind of market range. Open interest is the total number of open or outstanding options and futures contracts on a particular day which is delivered on a particular day.

Open interest is a part of futures and options markets where a lot of contracts keep changing from day to day not like the stock market, where the shares of a stock mostly remain constant. The increasing open interest means that a new or additional money is coming to the market which also means that existing market trend is gaining momentum which will continue further. Whereas the decreasing open interest means that the money is going out of the market that means it is a waning momentum and the market trend is soon going to change. An increase in open interest is considered as the bullish signal and a decreasing open interest usually signals at the bearish sign.

For more on Business & Stock Market News, visit BloombergQuint.




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