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How to analyze an Option Chain? | Option trading | CA Rachana Ranade - YouTube
Channel: CA Rachana Phadke Ranade
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Hey folks!!! CA Rachana Ranade here and I welcome聽
you all to a very important video which is about聽聽
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how to analyze option chain so if you have been聽
following my Thursday live streams which I take聽聽
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every Thursday at 9 00 pm then you might be aware聽
that I do talk about what could be the possible聽聽
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support or resistance levels for nifty, now many聽
a times the viewers tell me that Rachana you have聽聽
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not discussed in any of your YouTube video as to聽
how to interpret and analyze the option chain?聽聽
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and your wish or your command is definitely going聽
to be honored and that is why in this video I聽聽
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am not only going to talk about the various聽
components that appear in the option chain,聽聽
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I am also going to tell you how can you use these聽
components to identify the probable supports聽聽
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and resistances either for聽
any stock or for the indices.聽聽
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Now let's start with the basic terminologies in an聽
option chain so whenever I try to read an option聽聽
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chain you will see that the screen contains 2聽
major components which is a call side and put聽聽
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side, so remember that any option has two types聽
one is a call option and one is a put option, so聽聽
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now let's start with calls, if I am talking about聽
call option or calls in general there are always聽聽
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two parties to the contract there have to be two聽
parties to contract right one is a call buyer and聽聽
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one is a call seller, always remember call buyer聽
is bullish about the market and call seller is聽聽
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going to be bearish about the market because there聽
are two contradict reviews that is the reason why聽聽
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a trade is going to take place right also remember聽
one point that if I am talking about a call buyer聽聽
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he has a right to buy and if I am talking about聽
a call seller he has an obligation to sell,聽聽
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okay if this was too much for you and if you聽
did not understand this very well don't forget聽聽
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to check out this video wherein I have talked聽
about call options in detail right, moving on聽聽
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to the next one which is put options again as聽
usual put option will also have two parties聽聽
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one is a put buyer one is a put seller focus put聽
buyer is bearish and put seller is bullish here it聽聽
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is a little bit different exactly opposite, right聽
the put buyer he is bearish and poor buyer always聽聽
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has a right to sell and a put seller is going to聽
have an obligation to buy and again if you have聽聽
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not understood what is this all about then again聽
I have a separate video on what is put option聽聽
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and much more details about that so do not forget聽
to check out these videos if you don't know the聽聽
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basics of call and put if you are above aware聽
about all these things then continue the video.聽聽
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Now let's try and understand what is an聽
Option Chain and how to look up for it聽聽
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so I am on google and I have just typed NSE聽
option chain this is the first search result聽聽
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that you can see and I will just click on that聽
and once you click here you will see this big,聽聽
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it's on and on and on okay fair enough, now why聽
do we call this as an option chain if you remember聽聽
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in futures an option in specifically options I聽
said there are two types of options which two聽聽
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types? Calls and Puts so here you can see here is聽
something like calls here you can see something聽聽
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like puts okay this is for what this is for nifty聽
but could it be for some some specific symbol also聽聽
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so just as an example let us say I am talking聽
about IndusInd bank okay so here again you聽聽
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will be able to see that for IndusInd bank here聽
again the big data is available and again for聽聽
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both calls as well as for puts right but then why聽
is it called okay we understood it is an IndusInd聽聽
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option and IndusInd option we have call option聽
as well as put option but then why option chain?聽聽
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So for that if you just have a look at this聽
middle column you can see that strike price聽聽
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is available for multiple聽
strikes starting from 620,640,660聽聽
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right up to 1260, so basically both calls as well聽
as puts you can get for multiple strike prices聽聽
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and all these multiple strike prices are chained聽
together and that is why the name Option Chain.聽聽
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Moving on to one more important content of the聽
option chain that is known as the Expiry Date,聽聽
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now moving ahead with the same example of IndusInd聽
Bank now if I do a drop down here for expiry date聽聽
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here you can see that there are only three聽
expiries available which are these 30th June 2022,聽聽
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28th July 2022 and 25th August 2022 so typically聽
these are the last Thursdays of every month, so聽聽
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you might I mean you should not be confused that聽
June ends on the 30th and that is why maybe it is聽聽
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30th June as an expiry but for July then it would聽
have been 31st July, but it is not 31st July, it聽聽
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is 28th July so basically it is the last Thursday聽
of every month as an expiry date so you choose聽聽
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any symbol, I am just choosing let us say Indigo聽
and if I do that again you will see three expires聽聽
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only so for any stock there are going to be only聽
three expiries but instead of a stock if I take聽聽
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the example of an Index then for Index if you聽
do a drop down you can see multiple expiries so聽聽
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always remember this if I am talking about a stock聽
you will see only three expiries but for an index聽聽
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you can see multiple expiries number one, number聽
two you should also be aware of the fact that if聽聽
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I am talking about an index then you will have聽
a weekly expiry as well as a monthly expiry but聽聽
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if I am talking only about stock options in that聽
case you will have only and only monthly expiries.聽聽
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Well I want your maximum attention for the next聽
two minutes because I am going to tell you an聽聽
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important concept not only of Strike Price but I聽
am also going to tell you what is the meaning of聽聽
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Premium, now to explain this I am going聽
to take an example of MR. A and MR. B.聽聽
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Now MR. A who is a buyer and MR. B who is a seller聽
let's take an example of ABC limited this is the聽聽
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name of the stock and the LTP of this stock is聽
assumed 940. Now MR.A believes that okay I feel聽聽
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that this stock might go up and that is the reason聽
why I want to buy a call option for ABC limited,聽聽
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now MR. A says that I want to buy this call聽
option with a strike price of 900 rupees okay,聽聽
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now what do we mean by strike price of 900 rupees聽
in simple words MR. A is buying a right to buy聽聽
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the underlying asset in our example ABC Limited聽
at a price of 900 rupees, he has a right to buy聽聽
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at what 900, so now tell me if he is buying at聽
900 and if the latest traded price of ABC is 940聽聽
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life is set for A. He is going to buy at 900,聽
he is going to sell at 940, he is going to聽聽
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get 40 rupees profit okay but is seller聽
going to allow that?, No now seller is saying聽聽
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that if I am allowing you to do this transaction聽
you need to incentivise me you need to give me a聽聽
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reward for that and how much is going to be the聽
reward, reward is going to be the difference聽聽
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between the last traded price of the underlying聽
asset and the strike price so 940 - 40,聽聽
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40 rupees is going to be the premium, who is going聽
to pay to whom, Call Buyer is going to pay to the聽聽
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Call seller who is going to get incentivized聽
Call Seller is going to get incentivized聽聽
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okay so last time quick revision what was the聽
strike price you have to answer what was the聽聽
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strike price 900 he wanted the right to buy 900聽
what was the premium 40 what was the LTP 940 done.聽聽
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Well right now we understood that premium can be聽
calculated very easily right it is nothing but the聽聽
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price of the underlying asset minus your strike聽
price correct but does this happen in real life聽聽
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or is there a little bit of deviation for that聽
let's again continue with our example so here聽聽
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let's take the strike price of say 800 rupees okay聽
now tell me how did we calculate premium, premium聽聽
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was price of the underlying asset 843 minus strike聽
price which is 800. so tell me ideally the amount聽聽
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of premium for this strike price should have been聽
what? should have been 843 minus 800 that is 43聽聽
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rupees but if you see for June expiry the premium聽
is not 43 but it is 59.75 now the big question is聽聽
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that if it is not the same then why could it聽
be so ? it could be because of volatility that聽聽
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is nothing but Vega it could be because of time聽
to expire your theta and many many more points聽聽
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but if you want to know about more of these in聽
detail then you can surely go and check out my聽聽
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course on Futures and Options, but this was just聽
some important points that we have discussed till聽聽
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now in the option chain. The main part that with聽
the help of all these points how can we identify聽聽
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the support and resistance level is what we are聽
going to check out in the next part of the video,聽聽
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well before moving ahead with the support and聽
resistance levels let me tell you a little bit聽聽
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Well now moving on to the most important part聽
about identifying support and resistance levels聽聽
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but for that I hope you know the important聽
concept of open interest ! you don't know that聽聽
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okay let me quickly explain that and then we'll聽
move ahead so open interest is nothing but the聽聽
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number of contracts number of option contracts聽
that have been created but not yet closed聽聽
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for that let me again give you a simple聽
example assume that we have two parties MR.A聽聽
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MR. B. MR A is a call buyer assume he's聽
bullish and MR.B who is the call seller okay聽聽
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what has happened he has bought the contract and聽
he has sold the contract so what has happened聽聽
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option has been created but not yet closed聽
and that is why we say that open interest is聽聽
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one okay now what happens few days later few聽
days later assume both parties want to square聽聽
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off the contract square off the contract means聽
what now A wants to sell and B wants to buy聽聽
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when I say contract will be squared off it聽
will mean that open interest which was 1聽聽
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now has gone down to 0. fair enough right now聽
if I were to do a different scenario what can聽聽
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be a different scenario going back to our example聽
A was the call buyer B was the call seller now few聽聽
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days later A wants to square off A wants to sell聽
but B doesn't want to buy now A says let me find聽聽
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another party who is that another party assume聽
it is MR.C, now what will happen again understand聽聽
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A will be the seller and B will be the buyer聽
so now A's contract has been squared off,聽聽
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his position has been taken by MR.C and that is聽
the reason why open interest has still remained聽聽
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1 because C's contract is open and B's contract聽
is also open that's where we say open interest聽聽
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is still 1. always remember one more thumb rule聽
high oi indicates high liquidity and vice versa.聽
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I know I know I have made you wait for a long聽
time so without any further ado let's now jump聽聽
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into the option chain analysis of nifty well聽
this option chain is on the date of shoot,聽聽
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on the date of release the option聽
chain might look different okay聽聽
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now first things first I need to understand that聽
at what level are people most interested okay,聽聽
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so here if you see I have to focus on this data聽
point of open interest that is where people are聽聽
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entering into contracts and they are not yet聽
closing it right but OI is as on date till date聽聽
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what is the position, we also need to check change聽
in OI, change in OI happens on a particular date聽聽
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okay so today where is the highest change in OI as聽
I shoot the video if you just scroll through this聽聽
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entire column you'll see that today the highest聽
change in IO has happened at the level of 15,800聽聽
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this is the level where people are focusing the聽
most okay now we are on which side we are on to聽聽
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the call side okay so in simple words on the call聽
side at 15,800 level call buyers as well as call聽聽
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sellers are buzzing a lot okay but now we have to聽
understand that call buyers are bullish and call聽聽
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sellers are bearish so at 15,800 people there are聽
few people who believe that market will go up from聽聽
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here there are few people who believe that market聽
will go down from here big question is that whose聽聽
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view do we give more importance to and if I were聽
to choose this I have to combine the OI analysis聽聽
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with the LTP analysis the change analysis what聽
has happened to the LTP. LTP was what? premium聽聽
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whether premium has gone up this will be reflected聽
in the change column okay whether premium has gone聽聽
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up or whether it has gone down now you only tell聽
me if the premium has gone up with increased OI聽聽
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whose thought process is going correct? it is聽
the call buyers whose thought process is going聽聽
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correct because assume that they had bought it at聽
let us say 200 rupees and right now it is at 216聽聽
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rupees who will be happy? call buyers are going聽
to be happy okay so in this case I will be giving聽聽
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more weightage to whose view? to call buyer's view聽
okay but please understand had it been a reverse聽聽
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position that if premium would have fallen down聽
who becomes happy? if premiums fall down it will聽聽
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be the call sellers who are happy if premium聽
erodes right in that case we would have given聽聽
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more preference to the call sellers viewpoint聽
okay. So let's quickly understand what is the聽聽
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scenario as I shoot the video 15,800 this is聽
where highest number of people are interested聽聽
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highest change in OI happens here and what聽
has happened to the premium, premium has gone聽聽
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up so now you only tell me change in my聽
highest of 15,800 premiums have gone up whose聽聽
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viewpoint am I going to give more importance聽
to it is going to be the call buyer and聽聽
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that is where I conclude that at this level of聽
15,800 I believe that there is a strong support聽聽
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okay why because I am giving the importance聽
to call buyers position right so this is for聽聽
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what this is for call side, now let us shift聽
our focus to put side now you want to tell me聽聽
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there are maximum people interested at here you聽
can see change in OI today's position I am talking聽聽
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about change in OI is happening at 15,500, this is聽
how many open interest change in open interest is聽聽
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at 1729 okay and final OI you can see 10114, okay聽
fair enough now again same point if I am talking聽聽
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about put side there there are going to be put聽
buyers as well as put sellers, buyers are what聽聽
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bearish put sellers are what bullish whose聽
thought process will I give more importance to?聽聽
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for that I have I have to again understand聽
what has happened to the price movement聽聽
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price movement LTP the premium has gone down聽
who is going to be happy if the price goes down?聽聽
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it's always going to be the sellers who are going聽
to be happy if the premium goes down right and聽聽
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if I am talking about a put seller, put seller is聽
what put seller is bullish and that is the reason聽聽
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why I can say that at 15,500 there is much much聽
stronger support correct had this been a reverse聽聽
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scenario if the premium would have gone up I would聽
have given more preference to the view of a put聽聽
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buyer and in that case my conclusion would have聽
been different. All in all to sum up this entire聽聽
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discussion I hope you have understood that as on聽
the shoot date I believe that 15,800 is a strong聽聽
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support and also one more stronger support is seen聽
at 15,500 level. Can these support and resistance聽聽
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levels change? YES can they change every day聽
also? YES. Option chain analysis is a real-time聽聽
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data which gets updated so please keep on checking聽
this every single day for a better understanding.聽聽
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Well I am sure that any Thursday live stream from聽
today whenever I talk about option chain whenever聽聽
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I talk about support and resistance you will be聽
like Rachana we were able to identify the support聽聽
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and resistance level even before you talked about聽
that and I will be the happiest person on earth聽聽
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if you are yourself empowered to understand the聽
support and resistance based on option chain.聽聽
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If you want to learn more about Calls you聽
can click here and if you want to know聽聽
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more about Put options you can click here聽
till then Take Care, Jai Hind and Bye Bye.
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