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OPTION CHAIN ANALYSIS
1
Gaurav Goswami, 2 Jitendra Devra, 3 Kundansingh Mourya
1,2,3
1,2,3
Undergraduate Student, Dept. of Data Science,
Thakur College of Science and Commerce, Mumbai, India
Abstract:
Option chain analysis is a method used by traders and investors to analyze the prices and volatility of options contracts. It involves
studying the different strike prices and expiration dates of options contracts for a particular underlying asset, such as a stock or an
index
By analyzing the option chain, traders can identify potential trading opportunities and make informed decisions about buying or
selling options contracts. They can also use option chain analysis to determine the market's expectations for the future price of the
underlying asset and the level of volatility in the market.
Some of the key metrics that traders look at when analyzing an option chain include the implied volatility, which is a measure of
the market's expectation for future price movements, and the open interest, which is the total number of outstanding contracts at a
particular strike price and expiration date. Other important metrics include the delta, gamma, theta, and vega, which are used to
assess the risk and potential reward of different options strategies..
Key Words: Option Chain, Derivatives, Indian Derivatives, Option Chain Analysis.
INTRODUCTION
An option chain is a list of all available options for a particular underlying asset, such as a stock or commodity. Option chain
analysis involves examining this list of options to gain insights into the sentiment of the market and to make informed trading
decisions.
The purpose of this research paper is to provide an introduction to option chain analysis, exploring the key concepts, techniques,
and strategies involved in this approach. This research paper will review the existing literature on option chain analysis and provide
an overview of the most common methods used to analyze option chains.
The paper will begin by defining the concept of an option chain and explaining the basic terminology used in option chain analysis.
It will then describe the different types of options available in option chains and the various factors that can influence the prices of
these options.
The research paper will also explore the different methods used to analyze option chains, such as charting, technical analysis, and
fundamental analysis. The paper will provide an overview of the strengths and weaknesses of these different approaches and discuss
the situations in which they are most useful.
Finally, the paper will explore some of the most common strategies used in option chain analysis, such as option buying and
selling, option spreads, and option straddles. It will provide examples of how these strategies can be used to make profitable trades
in different market conditions.
Overall, this research paper aims to provide a comprehensive introduction to option chain analysis, highlighting the key concepts,
techniques, and strategies involved in this approach. By the end of this paper, readers should have a solid understanding of option
chain analysis and be able to apply these concepts in their own trading practices.
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PROBLEM DEFINITION
© 2023 IJCRT | Volume 11, Issue 3 March 2023 | ISSN: 2320-2882
Most of the market traders and investors use to trade without checking the markets sentiments of the Major Indices like Nifty 50
and Nifty Bank or the Data of the Option Contracts and they used to start a trade in a wrong direction or in a wrong time leads to
Losses.
As many times Majority of the stocks under BSE or NSE used to move proportionally or behave in a positive note if the Indices
are strong or Bullish and similarly as in Bearish condition.
No multiple parameters seen in the market like adding machine learning algorithm LSTM for test and accuracy, etc.
LITERACTURE SURVEY
The conclusions of several articles that have been examined and evaluated are summarised in this section. Records that were
examined both before and during project development are included in this section. In order to improve results while building
the Project, the documents provide a deeper grasp of existing solutions, how approaches might be optimised, and how
algorithms can be chosen based on their performance.
[1] "Option Chain Analysis for Predicting Stock Price Movements" by M. Abdallah and A. M. M. Nour El-Din. This paper
explores the use of option chain analysis for predicting stock price movements, using a dataset of option chain data and
stock prices for several companies. The authors use statistical analysis techniques to identify patterns in the data and develop
a model for predicting future stock prices.
[2] "A Comprehensive Analysis of the Equity Option Market" by C. Cao, T. H. Chan, and Y. Wang. This paper provides a
detailed analysis of the equity option market, examining the characteristics of option prices, trading volume, and open
interest. The authors use data from the Chicago Board Options Exchange to explore trends in the market and develop insights
into the behavior of market participants.
[3] "A Machine Learning Approach to Option Chain Analysis" by S. Sridhar and S. Narayanamurthy. This paper explores the
use of machine learning algorithms for option chain analysis, using a dataset of option prices and market data for several
stocks. The authors use a variety of machine learning techniques to identify patterns in the data and develop predictive
models for option prices and trading volume.
[4] "Options Trading Strategies Based on Option Chain Analysis" by A. Gopalakrishnan and G. R. Ramkumar. This paper
explores the use of option chain analysis for developing trading strategies, using a dataset of option prices and market data
for several stocks. The authors develop several options trading strategies based on different indicators and technical analysis
techniques, and backtest these strategies using historical data.
METHODOLOGY
Figure 1: Architecture Diagram
We suggest a system with a straightforward, pocket-friendly, user-friendly, User Interface that also saves time. Our suggested
strategy helps trader and users accomplish their goals. This approach suggests the market trend. Using techniques like PCR Ratio,
Fundamental, Graph which will help with accurate prediction.
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Figure 2: Data Flow Diagram Level 0
PROCEDURE
1.
Charting: Charting involves analyzing option chain data using graphs and charts to identify trends and patterns in the
market. Common charting techniques used in option chain analysis include line charts, bar charts, and candlestick charts.
2.
Technical analysis: Technical analysis involves using mathematical and statistical techniques to analyze option chain data
and identify patterns and trends in the market. This can include identifying support and resistance levels, trend lines, and
other technical indicators to inform trading decisions.
3.
Fundamental analysis: Fundamental analysis involves examining the underlying factors that can influence the prices of
options, such as economic indicators, company earnings reports, and news events. This approach seeks to identify the
intrinsic value of an option and make trading decisions based on this analysis.
4.
Greeks analysis: Greeks analysis involves examining the "greeks" or sensitivities of options to different market factors,
such as changes in the underlying asset price, volatility, and time decay. By understanding the greeks of options, traders can
make more informed decisions about the risk and potential rewards of different trading strategies.
5.
Implied volatility analysis: Implied volatility analysis involves examining the prices of options to infer the market's
expectations of future volatility. This can be used to identify mispricings in the options market and develop trading strategies
based on these mispricings.
6.
Options spread analysis: Options spread analysis involves examining the prices of different options with the same
underlying asset to identify opportunities for trading spreads, such as vertical spreads, horizontal spreads, and diagonal
spreads. These strategies can be used to limit risk and increase potential profits in different market conditions.
RESULTS
1.
Identification of potential trading opportunities: Option chain analysis can be used to identify mispricings in the options
market and develop trading strategies to profit from these mispricings. For example, traders may use options spread analysis
to identify opportunities for trading spreads, or technical analysis to identify trends in the market that can inform trading
decisions.
2.
Improved risk management: By understanding the sensitivities of options to different market factors (i.e. Greeks analysis),
traders can make more informed decisions about managing their risk exposure in different market conditions. This can
involve adjusting their trading strategies, hedging their positions, or using other risk management techniques.
3.
Insights into market behavior: Option chain analysis can provide insights into the behavior of market participants, such
as the expectations of future volatility (i.e. implied volatility analysis) or the sentiment of other traders (i.e. charting). These
insights can inform trading decisions and help traders anticipate market movements.
4.
Enhanced trading performance: By using option chain analysis to inform their trading decisions, traders may be able to
improve their trading performance and achieve better results. This can involve making more profitable trades, reducing
losses, or achieving other trading goals.
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Figure 3: OI Record Timely
Figure 4: Nifty OI Graph
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Figure 5: BankNifty OI Graph
CONCLUSION
Option chain analysis is a technique used in options trading to understand the market sentiment, predict price movements, and
identify potential trading opportunities. By analyzing the data in the option chain, traders can get an idea of the demand for options
at different strike prices and expiration dates, as well as the implied volatility and expected future stock price movements.
Some of the key metrics that traders use in option chain analysis include open interest, volume, the bid-ask spread, and the implied
volatility. These metrics can be used to calculate various ratios and indicators, such as the put-call ratio, the implied volatility skew,
and the delta, gamma, and theta of the options.
Option chain analysis can be used in a variety of trading strategies, such as straddles, strangles, and iron condors, among others.
It can also be used in conjunction with other forms of technical and fundamental analysis to make more informed trading decisions.
Overall, option chain analysis is a valuable tool for options traders, as it can help them identify potential opportunities and manage
risk more effectively. However, it requires a solid understanding of options trading and the underlying assets, as well as the ability to
interpret and analyze large amounts of data.
REFERENCES
[1] H. Henry Cao, Bing Han, and David Hirshleifer. "Option Chain Implied Volatility and Future Stock Returns." Journal of
Finance, vol. 61, no. 3, 2006, pp. 1253-1292.
[2] Lingjiong Zhu and Chuan-Hsiang Han. "Option Trading Strategies Based on Semi-Parametric Implied Volatility Surface
Prediction." Journal of Futures Markets, vol. 30, no. 5, 2010, pp. 441-469.
[3] Mikhail Chernov, Eric Ghysels, and Asger Lunde. "Exploiting Volatility Surface Information for Equity Option Portfolio
Management." Journal of Derivatives, vol. 14, no. 3, 2007, pp. 56-75.
[4] Brad M. Barber, Yi-Tsung Lee, Yu-Jane Liu, and Terrance Odean. "The Cross-Section of Speculator Skill Evidence from
Day Trading." Journal of Finance, vol. 56, no. 6, 2001, pp. 2275-2302.
[5] John Hull and Alan White. "Option Prices, Implied Price Processes, and Stochastic Volatility." Journal of Finance, vol.
42, no. 2, 1987, pp. 281-300.
[6] Jesús Saúl Amado and Alan E. Gelfand. "Implied Volatility Surface Estimation Using Orthogonal Polynomials." Journal
of Financial and Quantitative Analysis, vol. 41, no. 2, 2006, pp. 455-487.
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[7] S. G. Kou and Hui Wang. "Information Content of Option Prices and Implied Volatility in the Hong Kong Market." Journal
of Futures Markets, vol. 23, no. 3, 2003, pp. 283-302.
[8] Mark Mitchell and Todd Pulvino. "Do Option Traders Know More About Future Stock Price Movements?" Review of
Financial Studies, vol. 22, no. 2, 2009, pp. 751-786.
[9] Peter Carr and Dilip Madan. "Pricing and Hedging Volatility Derivatives." Journal of Derivatives, vol. 3, no. 2, 1995, pp.
54-68.
[10] Xinghua Guo, Jun Pan, and Jiang Wang. "On the Relations between the Expected Value and the Volatility of the Nominal
Excess Return on Stocks." Journal of Finance, vol. 56, no. 2, 2001, pp. 877-908.
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