Predicting a market range using Nifty options (2024)

This classroom explains how readers can gauge the market range by looking at Nifty options.

1. What is a Nifty option contract?

It allows a trader or investor to buy or sell the index at a preset price for delivery on a future date. In reality, only the difference is exchanged as the index can not be delivered. In this edition we will deal with monthly options.

2. How does one buy or sell the Nifty through options?

Those bullish on the Nifty can buy a call on the index at a strike of their choice. The bearish trader can buy a put on the Nifty, similarly. In both cases she has to pay a premium to the call or put seller, for assuming a heavy risk.

3. How can you tell the market range by looking at Nifty option chain?

Take the current month, expiry of which is fixed on September 26. On the call side (left) the maximum number of outstanding shares sold ( 75 shares equal one contract) are at the 11,700 strike (21.08 lakh shares) followed by 11,200 strike (20.01 lakh shares). So on the basis of outstanding positions on Friday, the first resistance for the Nifty is at 11,200 followed by 11,700, for the current month.

On the put side (right of option chain) maximum outstanding shares sold are at 10,800 (25.82 lakh shares) followed by 11,000 (22.67 lakh shares) on Friday. This means the first support kicks in at 11,000 — the Nifty ended on Friday at 11,023.25. The second support so far this month is at 10,800.

All these figures could change as this is only the beginning of the current expiry. So for now, for September, the broad range for the Nifty is 10,800-11,700. Immediate range is 11,000-11,200. That’s the way to read the chain.

Readers should remember that outstanding shares, also referred to as open interest (open buy-sell), can be seen from buyers side or sellers side as for every buyer there is a seller and vice versa.

However, since option sellers are wealthier and better informed than buyers in general, it’s good to interpret the chain from their perspective.

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Predicting a market range using Nifty options (2024)

FAQs

Can you predict stock price based on options? ›

Option prices significantly predict stock returns: stocks earn low returns when put options are expensive relative to call options. We attribute most of this predictability to the association between option prices and the conditions in the securities lending market.

Find Out More ›

How do you predict market range? ›

Range calculation formula:

*12%(Nifty IV level)*Square root of (28/365 ), which is 339.8 Points. So we can expect a movement of +/- 340 points from the current level for the Nifty index in the mo8nth of December. An expected upper range will be 10566 and lower range will be 9886.