Subscribe for real-time financial insights on Trade Target’s WhatsApp Channels
Option Chain Strategy helps traders understand what the market is thinking by looking at how call and put positions are building up. When analysed correctly, option chain data can reveal whether traders expect the market to move up, fall or stay range-bound. It can even signal early signs of strength, weakness or possible reversals before they appear on the price chart.
In this blog, we’ll break down how to use option chain data in a simple way so that you can read market sentiment with more confidence. We’ll also look at the key indicators inside an option chain that help traders judge the overall mood of the market.
What is Option Chain?
Before we dive into option chain strategies, let’s quickly understand what is option chain, so new traders have a clear idea.
Option chain is a detailed table that shows all available call and put options for a particular stock or index, along with their strike prices, premiums, open interest, volume and other key data. Traders use this information to understand how market participants are positioning themselves and what sentiment is building in the market.
Option chain helps you see where traders are placing their bets, whether they expect prices to rise, fall or stay within a range. By reading open interest, changes in contracts and price movement in calls and puts, you can identify potential support and resistance zones, spot early trend shifts and plan your trades more effectively.
A well-read option chain becomes a useful tool for market sentiment analysis, for intraday and F&O traders.
Key indicators in option chain strategy
By reading option chain, you can judge whether prices may rise, fall or stay flat. Here are few important indicators to focus on.
Open Interest shows the total number of active option contracts that traders have not closed yet. OI tells you how many traders are interested in a particular strike price.
- When OI increases along with price, it means more traders are adding positions in that direction, showing strength.
- When call OI rises sharply at a strike, it often acts as resistance, because many traders are expecting the price not to cross that level.
- When put OI increases, it usually marks a support zone, as traders believe the price may not fall below that point.
Volume shows how many contracts are traded at each strike price. Always use volume alongside OI to confirm that an OI spike represents genuine trades, not just notional positions.
Implied Volatility shows how much movement traders expect in the market. IV acts as a market’s “fear or excitement meter.”
- When IV rises, it suggests traders expect larger price swings ahead, often around events like results, news or data releases.
- When IV falls, it signals a calmer market with fewer surprises expected.
Tracking IV helps you gauge whether the market is preparing for a breakout, a sharp move or a quiet consolidation phase.
PCR compares the total put OI vs call OI. High PCR (>1) suggests a bearish mood, low PCR (<1) signals bullishness. Extreme PCR can signal contrarian turning points. Many financial websites provide PCR ratio, in case you don’t know how to calculate or don’t want to calculate.
If you are thinking how PCR Is Calculated
To calculate Put-Call Ratio using open interest, you divide the total number of active put contracts by the total number of active call contracts for that day.
PCR (OI) = Total Put OI ÷ Total Call OI
PCR value of 1 doesn’t always show clear market sentiment, because call options are usually traded more than put options. That’s why a PCR of around 0.7 is considered a more realistic benchmark for judging sentiment in equity options.
A PCR below 0.7 often indicates bullishness, while a PCR above 0.7 may point to growing caution or mild bearishness. However, traders must also consider market trend, open interest changes and volatility, PCR alone should never be the only signal.
Now you have got some basic idea about options and option chain indicators. Here are a few option chain strategy to interpret market sentiment and act accordingly:
Most Popular Option Chain Strategies
1. Bullish sentiment strategy
A bullish sentiment strategy helps you spot when traders expect the market to move upward. You can identify this by checking how call and put positions are built in the option chain.
When call OI rises sharply at nearby strike prices, while the index is holding steady or slowly moving up, it signals that more traders are betting on an uptrend.
Example:
If Nifty is near 25,000 and you see a sudden jump in call OI at 25,100 and 25,200, with stable IV, it shows growing confidence in the market moving higher.
In such situations, traders may choose long call or bull call spread strategies to benefit from the rise while keeping risk controlled. Falling put OI at nearby strikes also supports a bullish view.
2. Bearish Sentiment Strategy
A bearish sentiment strategy identifies when traders expect prices to fall. Option chain shows this clearly through activity in puts and calls.
If you notice a sharp increase in put OI and declining call OI at important strike prices, it suggests traders expect a downward move or are seeking protection.
Example:
If Nifty trades around 25,000, but heavy put OI builds at 24,800 along with rising volume, it reveals a bearish mood.
Traders may use put buying or a bear put spread here, which allows them to benefit from the fall while keeping losses limited. Rising IV during put buildup strengthens the bearish indication.
3. Range or Neutral Strategy
A range-bound or neutral market is when price lacks clear direction. Option chains make this easier to identify.
You may notice both call and put OI rising at nearby strike prices, which shows traders are positioning for a move but are unsure about the direction. IV rising adds confirmation that uncertainty is high.
Example:
If Nifty is around 25,000 and OI builds at 24,900 Puts and 25,100 Calls, it signals that traders expect volatility but don’t know which way the breakout will happen.
In such setups, traders often prefer straddles or strangles, which profit from strong moves in either direction. Neutral sentiment often appears before major news, events or data releases.
4. Trend Reversal or Shift Strategy
This strategy helps identify early signs of trend change before it becomes clear on the price chart.
A reversal signal appears when call OI starts falling (unwinding) while the price is still rising. This shows bullish traders are closing positions. At the same time, if put OI or IV begins to increase, it indicates growing caution or fear.
Example:
If Nifty is climbing toward 25,000, but traders suddenly unwind call positions and add puts at nearby strikes, it shows weakening bullish strength. This usually hints at a possible pullback or correction.
Traders can prepare by using protective puts, bear spreads or reducing long positions. A reversal gets stronger when price hits a known resistance level while OI shifts against the trend.
Common Mistakes While Analyzing Option Chain & How to Avoid Them
- Do not rely on OI or IV alone; always use these with volume and price movement.
- Avoid trading only on extreme PCR readings; use them as part of the bigger picture.
- Check expiry dates; last-minute option moves often behave differently due to max pain and settlement dynamics.
- Don’t trade far out-of-the-money options unless you understand their risks.
Final Words
Using option-chain data helps you look beyond price charts and understand what traders are expecting from the market. When you notice strong open interest buildup, shifting implied volatility or unusual activity at certain strikes, it can act as a useful sentiment signal. Just remember, any Option Chain Strategy should support your analysis not replace it. Always follow proper risk management and use these insights as one part of your overall trading approach.
FAQs on Option Chain Strategy
What is open interest?
Open interest shows the number of active option contracts. It helps you see where traders are putting their money and which strike prices may act as support or resistance.
How does IV help sentiment analysis?
Implied Volatility shows expected price movement. High IV means traders expect bigger swings, while low IV signals a calmer market with limited movement.
What is max pain?
Max Pain is the strike price where most option buyers lose money. Markets often settle near this level on expiry because it benefits option sellers.
Why do traders check OI changes during the day?
OI changes reveal how new positions are being added or closed. Rising OI strengthens the current trend, while falling OI can signal profit booking or a possible reversal.
Can option chain predict market direction?
Option chain doesn’t predict the market alone, but combined with OI, IV and price action, it helps you understand sentiment and identify likely support, resistance and trend strength.
Why is put-call ratio useful for reading sentiment in an option chain?
Put-call ratio helps you quickly judge market mood by comparing put and call positions. A higher PCR shows traders are more cautious or bearish, while a lower PCR signals confidence or bullishness.
Can rising put open interest mean something other than bearish sentiment?
Yes. Rising put OI usually suggests bearishness when prices fall. But if put OI increases while the price rises, maybe traders are hedging their positions, not betting on a decline. Always read OI with price action.
Happy investing and thank you for reading!
Disclaimer:
This website content is only for educational purposes, not investment advice. Before making any investment, it’s important to do your own research and be fully informed. Investing in the stock market includes risks, and you should carefully read the Risk Disclosure documents before proceeding. Please remember that past performance doesn’t guarantee future results, and due to market fluctuations, your investment goals may not always be achieved.
