How to analyse an option chain, with a NIFTY example
To analyse an option chain, find the call strike with the highest open interest above the spot price (resistance) and the put strike with the highest open interest below it (support), then check today's OI change to see whether writers are adding to those levels or moving them. PCR and volume confirm the picture; they do not replace it.
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Step 1: Which strikes have the most open interest?
Look above the spot price for the call strike with the highest OI and below it for the put strike with the highest OI. These are the OI walls. Option writers hold most of the open interest in Indian index options, and a writer who has sold the 24,600 call loses money if NIFTY closes above 24,600, so heavy call OI tends to act as a ceiling and heavy put OI as a floor.
Step 2: Where is today's OI change?
Total OI includes positions built last week. OI change shows what was done today. If the biggest put OI sits at 24,500 but today's fresh put writing is at 24,600, support is moving up. Intraday traders weigh OI change more heavily than total OI for exactly this reason.
Step 3: Is the level holding or shifting?
Compare the top strike with its neighbours. If the next strike on the same side is far smaller, below about 75% of the top value, the level is strong. If a neighbour is above 75% and still growing, the level is likely to shift towards it. In AOC these neighbours are the yellow cells, and the method calls the two cases shifting towards top (STT) and shifting towards bottom (STB).
Step 4: What do PCR and volume say?
The put-call ratio tells you which side is writing more overall. Above 1 means more puts are open than calls, usually read as support below and a bullish tilt; below 1 the reverse. Volume shows where the action is right now. A strike with big OI but no volume is a level nobody is fighting over today.
Step 5: How do you turn the reading into a trade?
Decide what would prove you wrong before you enter. A typical plan buys near support with a stop just beyond it, or sells into resistance with a stop above it, and exits if the level shifts against you. Size the position so that stop costs an amount you can lose without changing your next trade.
Worked example: reading NIFTY at 10:30
Say NIFTY spot is 24,560. On the call side, 24,600 CE has the highest OI at 112 lakh and 24,700 CE is next at 92 lakh, which is 82% of the top. On the put side, 24,500 PE has the highest OI at 98 lakh and 24,400 PE is at 71 lakh, 72% of the top. Today's change is +38 lakh at 24,600 CE and +41 lakh at 24,500 PE. PCR is 1.08.
The reading: the day's range is 24,500 to 24,600. Support at 24,500 is strong, because the next put strike is below 75%. Resistance is less settled, because 24,700 CE is above 75%; if its share keeps rising the wall moves up, and if it starts falling instead, 24,600 is the ceiling. Fresh writing is roughly balanced and PCR is close to neutral, so there is no reason to guess a breakout yet.
A trader might buy a call near 24,510 with a stop below 24,480, or wait for 24,600 to be crossed with call OI there being cut before going long. Either way the chain gives the levels and the stop; the direction still has to be confirmed by price.
What are the common mistakes?
Reading total OI and ignoring today's change. Treating a strike that shows 100% on OI as unbreakable even while a neighbour is catching up. Using PCR on its own as a buy or sell signal. And analysing the chain once at 9:20 and never again, when the useful information is how it changes through the day.
