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How to Use Open Interest Trading Strategy to Make Profits
Table of Contents
Introduction to Stock Market Strategies
There are many ways to earn money from the stock market. Some work in cash, some in Eno, and some in options. Most people work in options but are not able to earn due to a lack of a proper strategy.
Nine out of ten people are in loss because they work on incomplete knowledge. Today, we will discuss a strategy that can be used effectively 80 to 85 times out of 100. You can earn profit on an intraday basis.
Take a paper and pen, get ready, and watch till the end. Many important things will be covered. If you're new, subscribe to the channel and join. Let's dive into the strategy.
Understanding Option Strategies
In options, there are many hedge strategies like Debit Spread, Credit Spread, Iron Condor, Butterfly Two Leg, and more. Today, we will focus on one specific strategy.
You may have heard of Short Strangle. The key is to know how and which strike price to take. This strategy can be very effective if used correctly.
Overview of Short Strangle Strategy
In a Short Strangle, we create a position with one short call and one short put. Both options are of the same underlying stock and same expiry but different strike prices.
The condition for this strategy is that we feel the market will either remain sideways or have slight movement in any direction. The best part is that it works great when the market is in a wedge.
Calculating Strike Price Based on Open Interest
To calculate the strike price based on open interest, we need to visit the NSC website. Go to derivatives and you will see the options and OI of major indices.
On the NSC website, you will see the symbol, expiry date, type of call/put, strike price, LTP, volume, percentage change, value, and open interest. We need to sort the open interest from highest to lowest.
We want a strike price with the highest open interest, meaning more contracts have been made. Let's take the example of Nifty and select one call strike and one put strike of the same expiry.
Example of Nifty Open Interest
In Nifty, the strike with the highest open interest is 23000, but its LTP is very low, so it is not suitable for trading. We will choose the ATM strike price. For example, if Nifty's price is 22500, we will look at the put of 22400 with 192000 open interest.
We keep 100 points in Nifty and create a position with a 100-point difference above and below. This increases the probability of profit. We will now demonstrate this live.
Live Demonstration
We went to the NSC website, selected derivatives, and sorted open interest from highest to lowest. We chose Nifty with a strike price of 22600 call and 22300 put. We selected the expiry of 23rd May.
At 9:45 AM, when NSC data is visible on the website, create the position based on the mentioned parameters. Ensure you do not compromise on any rule.
Profit and Loss Calculation
Our profit is visible from this strategy. We get a range from 222170 to 2729. If the market moves within this range, we are in profit. If it goes below 22171 or above 2729, we face a loss.
In Bank Nifty, we can increase the range by 100 points or more to 150-200 points. We sell the call and put it accordingly. Always set a stop loss at half of the profit seen, maintaining a 1:2 ratio.
Conclusion
This strategy works accurately and is beneficial. Start using it with practice and observe how it benefits you. If you face any problems, we are here to help.
Remember, the key to success in options trading is having a solid strategy and sticking to it. Happy trading!
Frequently Asked Questions
The Short Strangle strategy involves creating a position with one short call and one short put on the same underlying stock and with the same expiry but different strike prices. This strategy is typically used when the market is expected to remain sideways or exhibit slight movements in either direction.
To select appropriate strike prices, visit the NSE website and examine the open interest data for major indices. Choose the strike prices with the highest open interest, indicating significant market activity. For example, if Nifty's price is 22500, you might select a put strike of 22400 and a call strike of 22600, creating a position with a 100-point difference above and below the current price.
Key considerations include ensuring the market is likely to remain within a certain range, selecting strike prices based on open interest data, and maintaining a strict stop-loss at half of the potential profit to manage risk. It is crucial to follow these rules without compromise to increase the probability of a profitable trade.
Calculate the profit and loss by determining the range within which the market needs to stay for the strategy to be profitable. For instance, if your selected strikes create a range from 22270 to 22730, you will be in profit as long as the market remains within this range. If it goes beyond these boundaries, the strategy will incur a loss. Adjust the range and stop-loss accordingly based on the underlying asset.
Yes, the Short Strangle strategy can be applied to other indices like Bank Nifty. Adjust the range and strike price differences to suit the volatility and price levels of the specific index. For Bank Nifty, you might increase the range to 150-200 points to accommodate its higher volatility compared to Nifty.
