Importance of Open interest and Greek in Stock Market Option Trading?

Importance of Open interest and Greek in Stock Market Option Trading?

What is the importance of open interest and Greek in stock market options trading?

Technical Analysis refers to the study of price, volume and open interest data with the help of the Japanese Candlestick Chart, Open Interest, Option Chain Analysis and the study of Options Greeks. The option is a highly leveraged instrument and helps the stock market traders to make big gains if appropriately analysed. We will understand how open interest in Future is interpreted, the importance of Greek analysis, and how it functions to select a strategy based on the anticipation of stock market traders in the Stock Market Course In Jaipur.

What is the Importance of Open Interest and Greeks in Options Trading in the Stock Market?

Option open interest and Greeks play an important role in your option trading strategies as it give you an edge while trading in Futures and Option Market

Future Open Interest Interpretation:

Change in

Volume                                          Price                                         Open Interest                                          Conclusion

1: More                                       Increase                                          Increase                             Fresh Long Position Build Up

Indication of Bullish Trend

2: Less                                       Decrease                                         Decrease                            Long Covering/Long Unwinding.

Mild Bearish Long Profit Booking  

3: More                                      Decrease                                          Increase                             Fresh Short Position Buildup

Indication of Bearish Trend

4: Less                                      Decrease                                          Decrease                            Short Covering/Short Unwinding.

Mild Bullish

Importance of Greeks in option Trading:

The Greeks measure the sensitivities of options to changes in the price movement of the underlying, time decay, volatility, and interest rates.

The Greeks are as follows:

1: Delta: The movement of the option premium concerning the change underlying stock position in your favour or against your trade. It indicates the speed at which the option position is moving relative to the underlying stock position. Typically, at-the-money options have a Delta of 0.5 for calls and –0.5 for puts, meaning that ATM options move half a point for every 1-point gain in the underlying asset. Delta shows the probability of an option expiring in-the-money because an ATM call option with a Delta of 0.5 means a 50% chance of expiring ITM. More options are deep ITM calls and put will have a Delta of around 1, meaning the option strike will have a 100% probability of expiring ITM. More importantly, the option is deep OTM call and put, which will have a Delta of near zero, meaning the option will have a near zero probability of expiring ITM. We can conclude that Delta can be interpreted in terms of the speed or rate of change of option premium concerning change in underlying and the probability of an option strike price expiring ITM.

1: ATM Delta 0.5

2: ITM Delta 0.51 to 1 (delta will increase for more ITM Strike Price)

3: OTM Delta 0.44 to 0 (delta will increase for more ITM Strike Price)

2: Gamma: Gamma is considered as the second derivative of the change in underlying asset or the first derivative of Delta and can be expressed in two ways: rate of change of delta concerning the change in underlying price or as the odds of a change in probability of the position expiring ITM. Gamma generally warns you that the Delta is about to be changed. Both calls and puts have positive Gammas. Typically, extreme deep OTM and extreme deep ITM options have near zero Gamma because the odds of a change in Delta are very low.

3: Theta: Theta stands for the time decay (number of days). The option buyer has a negative theta, and the option writer has a positive theta.

4: Vega: Vega stands for the option position’s sensitivity to the change in volatility. Options premiums tend to increase/decrease in value when the underlying stock’s volatility increases/decreases. So, an increase in volatility favours the option buyer and against the option writer. Similarly, a decrease in volatility is negative for the option buyer and vice versa.

5: Rho: Rho stands for the option position’s sensitivity to interest rates. It has negligible impact on stock and commodity Options, but it has a high impact on interest rate derivatives.

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Trading strategies can be:

Long Call and Put

Bearish Call Spread

Bearish Put Spread

Bullish Call Spread

Bullish Put Spread

Strip

Strap

Long Straddle and Long Strangle

Writing Strategy can be:

Short Call and Put

Short Straddle and Strangle

Long Butterfly and Iron Butterfly

Long Condor and Iron Condor

Conclusion: We can conclude that understanding option Greeks can help an option trader select a strike price, and interpreting option chain position will help him select the combination of strike price for trading and writing strategies.

Strategy can be bearish, bullish and neutral.