Option Chain Analysis

1. Understanding the Structure of an Option Chain

An option chain typically has two halves:

Left side → Call Options (CE)

Right side → Put Options (PE)

Each row corresponds to a strike price, and each strike shows several key data points:

Common Columns in CE & PE:

OI (Open Interest) – Total active contracts that are not yet closed.

Change in OI – Shows whether new positions are being built (addition) or squared off (reduction).

Volume – Number of contracts traded during the day.

LTP (Last Traded Price) – Price of the option premium.

Bid/Ask Prices – Best current buy and sell prices.

Implied Volatility (IV) – Market expectation of volatility.

The strike price sits in the center of the table, dividing Call and Put data.

2. Why Option Chain Matters

Option chain analysis allows a trader to:

✓ Identify trend direction

Increasing call writing may suggest bearish sentiment, while heavy put writing may suggest bullish sentiment.

✓ Spot support and resistance

High Put OI indicates strong support.
High Call OI indicates strong resistance.

✓ Understand market liquidity

Higher OI and volume mean more active participation and better entry/exit execution.

✓ Track institutional activity

Big spikes in OI usually represent large participants (FII, proprietary desks).

✓ Predict short-term price movements

Based on the balance between CE and PE data.

3. Key Components of Option Chain Analysis
A. Open Interest (OI)

(Open Interest is the heart of option chain analysis.)

Rising OI + rising price → Long Build-Up

Rising OI + falling price → Short Build-Up

Falling OI + rising price → Short Covering

Falling OI + falling price → Long Unwinding

These combinations provide clues about ongoing market activity.

B. Change in Open Interest

This tells you what is happening today.
Example:

If Put OI is rising fast, traders expect the market to stay above that strike → support.

If Call OI is rising sharply, traders expect resistance at that strike.

C. Option Premium and LTP Movement

Premiums often rise due to:

Trend strength

Increased volatility (IV)

Time remaining to expiry

Premiums collapse due to:

Trend reversal

Drop in IV

Time decay (theta)

D. Implied Volatility (IV)

IV reflects expected movement.

High IV → high uncertainty → expensive options

Low IV → low uncertainty → cheaper options

IV also jumps ahead of major events such as RBI policy, budget, US Fed meetings, elections, etc.

4. Identifying Support & Resistance from Option Chain

This is one of the most practical uses of option chain.

A. Finding Support Levels

Support is identified by:

Highest Put OI

Sharp increase in Put OI

Put writers actively defending a strike

Put writers (sellers) are usually strong hands, so they provide floor/ support.

For example:
If 22,000 PE has the highest OI, then 22,000 becomes strong support.

B. Finding Resistance Levels

Resistance is identified by:

Highest Call OI

Big Call OI additions

CE writers defending a strike

If 22,300 CE has the highest OI, then 22,300 becomes strong resistance.

5. PCR (Put-Call Ratio) Analysis

PCR is a sentiment indicator extracted from the option chain:

PCR = Total Put OI / Total Call OI

Interpretation:

PCR > 1 → bullish sentiment (more puts written)

PCR < 1 → bearish sentiment (more calls written)

PCR around 0.8–1.2 → neutral market

PCR extremes:

Around 1.5–1.8 → overbought (possibility of downtrend soon)

Around 0.5 or lower → oversold (possibility of uptrend)

6. OI and Price Action Combination

Combining price action with OI gives the highest accuracy.

Bullish Signs

Increasing Put OI at lower strikes

Decreasing Call OI

Price closing above major CE writing zones

PCR rising

Bearish Signs

Increasing Call OI at higher strikes

Heavy CE writing above spot

Price closing below major PE supports

PCR declining

Sideways Signals

Both CE and PE addition at surrounding strikes

Narrow PCR near 1.0

Option premiums decaying fast

7. Option Chain Traps and Short Squeezes

Option chain also reveals squeeze situations:

Short Squeeze (Bullish Explosion)

Heavy Call OI begins to unwind

Price breaks above resistance

CE writers forced to exit → premiums rise sharply

Long Liquidation (Bearish Slide)

Heavy Put OI unwinds

Price breaks below support

PE premiums shoot up

These moves are usually fast and violent.

8. How to Use Option Chain for Intraday Trading

Intraday traders use:

A. Change in OI (minute-by-minute)

This reveals immediate momentum.

B. Straddle & Strangle Levels

High combined premium = expected movement range.

C. ATM (At-the-Money) Behavior

If ATM call OI rises → bearish

If ATM put OI rises → bullish

D. Premium Breakout Zones

Sharp change in CE or PE premium suggests a trending move starting.

9. Expiry Day Option Chain Analysis

Expiry days are different because:

Time decay is extreme

OI changes rapidly

Range-bound behavior is common

On expiry:

Highest CE + PE OI combination often predicts the max pain level (where sellers profit the most)

Prices tend to gravitate around this level

10. Max Pain Theory

Max Pain = Strike price where option buyers lose maximum money.

It is calculated from the option chain.
On expiry day, price often moves toward max pain.

11. Option Chain for Swing and Positional Trading

Positional traders use:

Total OI across all strikes

IV trends

Monthly expiry data

Support/resistance based on long-term OI

If Put OI is high for next month → bullish for swing trades.
If Call OI dominates → bearish.

12. Mistakes Traders Make in Option Chain Reading

Only checking OI without price action

Ignoring IV changes

Misinterpreting unwinding phases

Trading without considering broader market events

Following high OI blindly without confirming by price behavior

Option chain should be combined with technical analysis for best results.

13. Practical Example Summary (How a Trader Should Use the Chain)

Identify highest PE OI → support

Identify highest CE OI → resistance

Analyze Change in OI → fresh positions being created

Check PCR → market sentiment

Observe IV → volatility expectations

Track premium movement → strength of buyers or sellers

Combine with price action to confirm trend

Final Thoughts

Option Chain Analysis is a vital skill for traders in index and stock derivatives. It reveals the psychology of option writers, helps identify crucial levels, indicates short-term momentum, and offers insights into market direction. When used properly along with charting tools, it significantly enhances accuracy in intraday, swing, and expiry trading.