Hi @nithin
I have a basic question on options. How do Option writing acts as Support and Resistance…? Usually I have seen people says there is huge call/put writing at particular price so price may not breach that level. As per my knowledge when spot prices moves, futures of that underlying moves and option price move based on the futures but how come there is relationship between options writing and support and resistance…?
Hi @challa-kartheek
Since selling options involves unlimited risk and the deployed capital is way more than the capital needed for buying options, Option writers are perceived as well informed traders who know what they are doing, and if there’s an increased OI for a certain strike price denoting the maximum number of Option writers, the strike price may serve as a support/ resistance for the traders.
adding to what @Himalay_Sharma mentioned.
Option writer makes money when price do not go to the given strike price. That means, if there is a huge OI at a particular strike, it is where they think price will not go. But again, market doesn’t go according to any one’s rules 
If you go by theoretical definition, the value of the underlying should drive its derivatives, but practically it doesn’t work that way. What trades more typically drives what trade less.
Yesterday, 31st Jan 2022
Total equity or spot turnover = 10k crores. You compare that to futures = Rs 1lk crores (10 times more). You compare to options = Rs 39lk crores (390 times more). Yes, comparing options contract turnover is not a fair comparison. Maybe we should do it based on the absolute money that was involved in the transaction.
Let us assume 20% of Spot turnover is where 100% of funds were provided for, so equity turnover = Rs 2k crores.
Similarly for futures, 20% of Rs 1lk crore = Rs 20k crores.
Option premium turnover = Rs 37k crores.
Even with the above comparison, as you can see options contribute to most turnover and also the most open interest on the exchanges. Hence what happens to options tend to determine what happens to futures and stocks. Since the belief is that smart money is usually writing options, strikes at which more OI is built up is usually considered as good support or resistance based on if it is puts or calls respectively.
Hi Sir,
In case of indices, I was under the impression that the value is determined by its constituents. I checked the turnover of the top 5 constituents (which is 42% of the index) in various segments to find out that cash turnover is higher than options.
So, whether the above theory holds good in these individual cases i.e spot prices (higher trade volume) determine derivatives’ prices (less traded) thereby weakening the OI & Support/resistance relationship. Also, is it appropriate to compare the cash market turnover ( i.e turnover in stocks only) of Rs. 10k crores with turnover of index options (Rs. 32k crores) and stock options turnover (4k crores). Thanks in advance.
Most trading activity happens in Index options. Index options affect what happens to the indices and indices, in turn, determine what happens to the underlying stocks. If you are looking at stocks, I don’t think it makes sense to look at just the stock options OI to determine support and resistance. What happens to the index is more important. Unless of course a certain stock has huge OI build up in options.
Thanks a lot sir for simplifying the process. Gave me a new perspective.
Thank you @nithin for response. I have one more query, pardon me if it is very basic. I couldn’t get the answer from google so shooting it here.
If Nifty is at 17000 and if there is high pe writing at 16800 then it means nifty might not fall below 16800 as there is strong option writing.
but what does it mean if Nifty is at 16800 and there is a strong 17000 pe writing…? If pe writing is below the current price it acts as a support but I couldn’t understand if pe writing is above the current price.
Today (22/02/2022) I have been observing that 17000 pe is increasing continuously even when nifty is below 17k. is that mean nifty will close above 17k(of course today it has closed)
Yes , Instead of buying futures, they are selling itm pe . That’s a bullish view.
Writing deep in the money puts is almost very similar to buying futures especially as you get closer to expiry. One of the reasons OI on such options can go up close to expiry is because of arbitrageurs. Let me give you an example, today at the close of market (23rd Feb, 1 day before expiry) Nifty closed at 17063, Nifty fut at 17067, and Nifty 17200 puts at 164.
If you sold Nifty fut at 17067 and Shorted 17200 puts at 164, you make a 31 point profit as long as Nifty closes tomorrow below 17200. (17200-17067 = 133, Premium = 164, 164-163 = 31).
Margin required for this trade = Rs 1.2lks, potential profit of Rs 1500 or ~1% for a day. Considering you will lose money only if Nifty goes against you by 135 points, it is a decent trade to take, especially for someone who isn’t bullish and is now getting a margin of safety.
I guess you mean ‘similar to futures long’.
And here, I think you mean ‘shorting nifty future’ (instead of buying as you are suggesting).
Damn, cognitive blindness. Thanks, corrected it. 
Thank you for answering @nithin sorry for troubling with another question.
Today(24/02/2022) from morning there was good pe writing at 16400. During market hours nifty broken 16400 but still 16400 PE OI didn’t reduced much is that mean all the pe writers holding the positions in loss without exiting during market hours…? If my statement is correct then how reliable it is to trust/analyze/read OI data. Because today at watching 16400 PE OI as it is not reducing I thought market might withhold 16400(also there is confluence PA support though at 20th dec candle)
Trading intraday based on the intraday OI data doesn’t make any sense at all. Check this out
