F&O data – the basic fundas

The Basics (not the usual price/volume):

  1. Open Interest (OI) :
    in simple terms, this is the net number of long/short positions outstanding at any given point of time. For each buyer of an F&O contract there must be a seller.

    From the time the buyer or seller opens the F&O contract (call/put/future) until the counter-party closes it, that contract is considered 'open'.

    A large open interest indicates more activity and liquidity for the contract. The more the buildup the heavier the counter becomes, and depending on who comes out stronger, the bulls or the bears, the price follows.

  2. Basis (premium/discount) :
    is the difference of the Future price over the underlying spot price. It essentially is a bullish/bearish indicator of whether the buyer is willing to pay extra premium & expects the price to rise in future, or whether the short-seller is selling at a discount thinking the price is going to fall in the future. When expressed as a percentage it is called the basis% and is calculated as

    basis% = 100*(future-spot)/spot.

    CoC (cost of carry) is nothing but the basis computed in annualized terms, as good as the rate of interest for carrying the position forward.

    Coc=(basis% *365) / (days-to-expiry)

  3. Near (1), Next (2), Far (3), Long (4) : the data for the 3 month’s series we can see break up as

    near: for current month(1)
    next: for month 2
    far: month 3
    long: for long-dated contracts beyond the 3 regular months

  4. Rollover : is a close estimate of how many future positions are actually being carried over to the next month series, (but no one actually knows the actual figure, it is just a notional assumption). The formula we use is :

    Rollover% = 100 * (OI_Next(2) + OI_Far(3) )/ (OI_future of all 1+2+3 months combined)

  5. RollCost: is essentially the difference in the next & current month ‘Futures’ price only  i.e. the premium/discount the buyers/sellers are willing to pay to roll their positions to the next month. A positive rollcost generally indicates that a bullish position is being rolled or built for the next month and a negative rollcost indicates a bearish one

    RollCost% = 100 * (Price_Next(2) - Price_Near(1) )/ (Price_Near)

  6. Implied Volatility (IV) : in simple terms it is how much volatility the market is expecting in the future ( vis-à-vis the Historical Volatility HV which is calculated from the past price movements). A higher IV means people expecting a lot of volatility & are thus willing to pay a higher price / premium in options to protect their interests. A lower volatility means people are getting comfortable with current market scenario.
    For IV we use black-scholes formula to calculate IV for each strike, using futures price for underlying & zero interest rate ( since all are European options). Then we apply a volume-weight and calculate overall IV of a symbol through a volume-weighted avg of IVs across strikes to arrive at one common IV for that stock/symbol i.e.

    IVsum = (IV1*Qty1) + (IV2*Qty2) + ... (IVn * Qtyn)
    QtySum = ( Qty1 + Qty2 + ........... QtyN)
    IVavg = IVsum / QtySum
    where 1,2,…N represent individual strike contracts

  7. PutCall Ratio (PCR) : a barometer for investor sentiment, it is the ratio of the open-interest positions of Puts to Calls.

    PCR_OI = OI_Puts / OI_Calls

    A very high PCR can trigger a fall and a very low PCR can trigger a rise in in the markets. There is also a PCR for volume which is a ratio of puts traded to calls traded, representing bullish/bearish sentiment for traders.

  8. Delivery : it is the positions carried over trading sessions in the cash market of all exchanges combined

    (i.e. it goes into the demat account of the trader’s portfolio).

    Delivery is to cash market like OI is to derivatives market. Spikes in deliveries are indicators that major price action can happen from that point, as it forms a support or resistance, depending on whether big positions have been built up or offloaded.

    What we show in myfno.com is 3 unique things –>
    1.  BSE + NSE delivery qty combined
    2.  delivery% of the total both exchanges traded quantity to get an overall pic
    3.  delivery %change  vis-a-vis the previous day.. so any delivery spikes can be visible if delivery_chg>100%

all-in-one F&O data
all-in-one F&O data

Magic of the PCR (putcall-ratio)

the magic of PCR

The Put-Call ratio (PCR-OI) has a very simple definition

PCR = Open Interest of ALL Puts
           Open Interest of ALL Calls

Albeit its simplicity, it is a very powerful indicator, as it actually gives a sense of where the market is heavy –> on the buy or sell side.

Remember we use the PCR of OI (open int.)  and NOT volume.

Since OI by its nature itself is cumulative, (i.e. builds up over trading sessions) and has the inherent property of quantifying positions being ‘open’ i.e. how much money is at stake.

So, any pressure from either bulls or bears can take the market in their direction.
It is just that who has the upper hand & takes the lead, and of which we can get a sense of understanding through the magic of PCR 🙂

My observations are highlighted in the picture below.

the magic of PCR
the magic of PCR

NOTE: Like any other indicator, this is not to be seen in isolation, but used as a confirmation along with other parameters to confirm any view on the market.

Today on 18 Sep 2014, Markets again went up almost 2%.. but just see what was happening in PCR ( a U-turn) a day before from 16th to 17th sep. which is generally a signal of trend reversal in the making –>