Don’t tell me to read varsity open interest module. I could not find answer there so…asking here.
I learned that highest call open interest on indicates resistance and highest put OI indicates support.
For example - ITC 190PE has OI 2,336,000 and change in OI is 1,443,20
and ITC 200CE has OI of 6,972,800 and change in OI is 1,891,200
So we may think those are levels for support and resistance but in case of when price moves against call or put writers original positions, how can they defend those positions so they don’t end up in loss ?
What possibly they can do? is there something they can actually do to defend their position? or they can just watch their resistance/support are broken ?
So when they short cover or long unwind …they will still make loss …may be less.
Apart from covering …is there any thing else they can do …like under the table or not known to retail public or new channels?
Nope, there is no need of any such under the table channel. The exchange is strictly monitored by SEBI. There are clearing houses involved, and anything under the table will displace lot of top management.
Informed Traders have other ways of making the traders believe what they have found is wrong. If they are short covering, they might make you believe they are going long . There are bluffers who can get the general market to enter in a position by breaching a established price resistance.
Such inferences can be done with continously monitoring the market and trying to infer price action. Also by reading up lot from the experienced traders.
Can you please share how can we judge if bluffing is going on? What do we look for to monitor /infer?
Also for example 170pe in ITC has increase in OI even yesterday …even though price was falling …can we assume that it is one of those bluffing ?
I too hoped that it will be easy to spot such anamolies and make a profit out of it. However, traders are very good in hiding their intentions, and market as a whole takes time to assimilate and show these information. Start by asking what the market, buyers, sellers are percieving at this moment? Then search for an answer.
We are trading the market perception of the price, not the price itself. What Perception am I talking about? Here are some examples.
With the open interest you can find what the market participants are thinking and percieving. If the OI of a particular strike call increases we can infer, only infer and not assure, that participants are thinking the market will cross that strike upwards. This is a perception of the market participants. If the market goes above this strike price, then the call writers will cover their shorts leading to a price resistance at that price.
We can look at the market depth. Market depth shows only the passive traders(buy/sell). They may not trade in near future. We can try to match this change with the traded quantity with the Buyers/sellers standing in queue increase or reduce. If the traded quantity increases by 10,000 and 10,000 buyers reduced, then we can infer that 10,000 passive sellers became agressive by selling at market and leaving with their money.
These are examples which the microstructure pundits out there find and share. These relationships show the traders what is going on in the market and guess what is happening. It is considerable work, and trading is more difficult than being a brain surgeon. One has to be more passionate about making money and then keeping it.
May not have answered your question. You have the direction to find your own questions and then its answers. Happy trading.
I am little confused here …if market goes above that call strike price than call writers will start covering their shorts but that will actually increase the price above strike even faster …so why do you say it will lead to resistance …basically it will break that resistance…correct me if I am wrong.
Here is another confusion…you said qty traded increased so buyers reduced …I understand that part but when u said sellers became aggressive by selling …do u mean sellers became aggressive at little less price than they originally wanted (which is why they were in queue or passive)