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How Nifty options indicate market range

The market is likely to veer in 8500-9000 range in the current derivatives series expiring March 30.

How does one know this looking at Nifty option chain?

1. What are Nifty options?
They allow you to buy or sell Nifty at a particular level in exchange for a premium you pay to the sellers. They are of two types -calls and puts.

2. When do you buy a call or a put?
When you are bullish on the market you buy a call option, and when bearish buy a put. The seller of the call or put collects a premium from you, which is basically the option’s price.

3. Who are the buyers and sellers?
Buyers on net basis can be re tail and foreign institutional investors. Option sellers are normally HNIs and prop desks of brokers. Options can be used to hedge one’s portfolio. For e.g., if you have part of Nifty 50 stocks in your portfolio, you can buy a put option on Nifty.

4. So how can you tell market range looking at Nifty options?

By seeing the open interest (OI) on the option strikes or levels.

For e.g., in March series at Thursday closing, 8,500 puts had highest OI and 9,000 calls had highest OI. This is because sellers don’t expect Nifty, as of now, to conclusively breach 9000 plus average premia collected from call buyers or breakdown below 8,500 minus average premia collected from put buyers. The OI thus gives a broad kind of market range.

The 8,500 put has 30.92 lakh shares OI while the 9,000 call has 33.61 lakh shares OI. The market on Thursday was 8,939, which means a decisive break above 9000 could see sellers covering short positions depending on Uttar Pradesh election results.