Learn Stock Market
A short primer on F&O, option Greeks, OI, PCR and risk.
1. What are futures and options?
A future is an agreement to buy or sell at a set price on a set date. An option gives the buyer the right, not the duty, to buy (call) or sell (put) at a strike price by expiry. The option seller takes the obligation and collects the premium.
2. Reading an option chain
The chain lists strikes with call data on one side and put data on the other. Look at open interest (OI), change in OI, volume, implied volatility (IV) and last traded price (LTP). The strike nearest the spot price is at the money (ATM).
3. Open interest and build-up
Rising OI with rising price suggests long build-up. Rising OI with falling price suggests short build-up. Falling OI with rising price suggests short covering. Falling OI with falling price suggests long unwinding. Large call OI often acts as resistance and large put OI as support.
4. Put call ratio (PCR)
PCR is total put OI divided by total call OI. A high PCR can mean puts are being written as support (bullish) or hedging is heavy. A low PCR can mean call writing as resistance (bearish). Read it as a sentiment gauge and not a signal by itself.
5. Max pain
Max pain is the strike where the total payout to option buyers at expiry is smallest. Some traders expect price to drift towards it near expiry. It is a tendency, not a rule.
6. The Greeks
Delta: price change per 1 point move in the underlying. Gamma: how fast delta changes. Theta: time decay per day. Vega: change per 1% change in IV. Try them in the Option Pricing Calculator.
7. Implied volatility and VIX
IV is the volatility the market is pricing in. High IV makes options expensive for buyers and attractive for sellers. India VIX summarises expected Nifty volatility over the next 30 days.
8. Risk first
Decide your stop loss and position size before you enter. Selling options carries large or unlimited risk. Use the Risk Management Calculator to size trades.