Nifty Options Chain Patterns

[Fundootrader]

Options are tool which is used by market participants to both gamble (read as: naked buys) or to hedge or to make money using limited risk strategies.

Retailers mostly come in the gambler category (see on forum how many folks trading in naked calls/options based on market trend/movement) and HNI's and few retail traders use option strategies - straddles/strangles etc.

But both of these are small fish in big sea - the real sharks of trading world - FII's and domestic institutions use options for hedging and also making large bets (See the EOD data - FII's brought XYZ Cr of options etc)

Just like when the sharks/whales move in sea they can't be hidden, same for options - whenever trader sharks are planning to move the market or anticipating market movement, they create noise in options chain - creating what I call patterns prior to move.

Purpose of this thread is for education - to capture those patterns prior to move - write assumptions and then post the movement analyze the assumptions and the correlated move.

Disclaimer: This thread is an observation thread of market patterns and and an attempt to decipher option chain patterns. I'm also learning on the go - so please don't put in option's technicals on the thread and don't bash/critisize

a) Do not trade based on these patterns.
b) Visual trends - These are purely visual trends - so no view or analysis of options technicals (time decay etc) is considered
c) Multiple versions of same pattern - What may seem as same visual pattern - may have different movements - as combination of other hedges on opposite side may affect the outcome - This thread will document the learnings - So don't expect they same pattern to give same movement till we confirm on single pattern with combinations

 

[Fundootrader]

Pattern#1 - Escalator Pattern

Time of formation : EOD

Details:

This pattern is seen at EOD (not at 3.30 pm, but post options data is refreshed at 5.30 pm).

In this pattern, the OI of 5 to 6 immediate "out of money options" increase - of the opposite side of market for the day.

so if the market went down, at EOD you will see out of money CE's stacked up or if the market's went up, you will see out of money PE's stacked up

Analysis:
- Options Writer perspective - Expecting markets to fall significantly further from current level - writing at all the out of money CE's for BTST
- Options Buyer (Hedger) perspective - Expecting large upmove in day/two - building up hedge positions by buying options in out of money

Observations:
- Typically if hedgers are expecting the market to move up, they will not be buying options in stack/escalator manner - instead they buy deep out of money options - say if market is at 7045 - they will be buying 7300/7400 and not 7100/7200 heavily
- The OI of deep out of money PE's when CE's are in pattern is also increasing - 6700/6800/6900 - indicating movement - while the in the money PE's are being squared off (could be profit booking after fall


Example: EOD option chain of 16/Feb/2016 - Markets went down by 1.45% and out of money CE's in escalator pattern. Let's see at EOD today - if markets moved up or down - what was impact of this pattern on trading on 17/Feb/16

Update@ 9.45 AM - Market went down : -0.8%

- PE Escalator setup seen

 

[TradeOptions]

Thanks for starting the separate thread to explain this fundoo bhai. Otherwise your posts gets buried in the General Chit Chat Thread.

Regards

 

[Fundootrader]

Pattern#2 - Jump pad Pattern

Time of formation : Intraday - Just before upmove

Details:

This pattern is seen intraday - right before up or downmove.

This pattern comprises of 2 setups:
- High OI at N+1 (first) OTM (CE or PE) - where the market is going to move
- High OI at N-1 and N-2 OTM - opposite side - providing jump pad

As an example - take below options data - right before the move @ 10.48 AM when market was @ 6998 - few minutes prior to +30 points jump

Here you can see - High OI @ 7000 CE and High OI @ 6900 & 6950 as well as 7000 PE

6900 & 6950 PE OI acts as jump pad and 7000 CE OI act as confirmation of upmove

Typically the market will move in direction of 7000 CE series OI - so essentially intraday writers make money by writing 7000 Calls and 6900/6950 Puts

Result: Below is snapshot within 30 mins of this pattern - Completly burried - Nifty up by 50 points

 

[jassinko]

i dont know the name but when atm call and put OI increases with the increase of next and next to next call/put otm and decrease in other other side two otms........ market usually jump 90-140 points to and fro of that atm......... like what happened on friday, yesterday and today............ noticed this few times ago but didnt saved the screenshots......

 

[Fundootrader]

i dont know the name but when atm call and put OI increases with the increase of next and next to next call/put otm and decrease in other other side two otms........ market usually jump 90-140 points to and fro of that atm......... like what happened on friday, yesterday and today............ noticed this few times ago but didnt saved the screenshots......

I had seen this - last week - unfortunately don't have that snapshot - we will see those again and will post that pattern here

Today I'll post the pattern based on xx50 series Open Interest

 

[broscasino]

Dear Sir,
your posting is very helpful pls continue the thread

 

[tradeninvest]

Hello,
It seems that its been a while since this thread has been active.. I nevertheless find these posts very interesting. These patterns did you learn somewhere or have you made these rules with your experience? I would really appreciate it if you could guide me on this.


Best Regards.