How to interpret this BankNifty Open Interest Analysis file

Before we start our analysis it is important to understand / learn the basics of Open Interest. Here are the basics –

Call (CE)​ – Buy when bullish, Sell/Write when mildly bullish or feel a specific level is resistance

Put (PE)​ – Buy when bearish, Sell/Write when mildly bearish or feel a specific level is support

Example​ – If your analysis says that 27000 level won’t break on the upper side in next one week, you may write 27000 CE.
Similarly if your analysis says that 26500 level wouldn’t break in next one week on the lower side then you may write 26500
PE to eat the premium.

In Options trading, time is like ICE. With time both melts. If volatility increases then premiums go expensive & you may
witness both sides wild moves.

Let’s understand the psychology behind this Options buy/selling -

There are 2 types of participants in the market –

1) Retail (with less capital)

2) Smart money (Big fund houses -MF, HF, FII, DII etc.)

With less money, retail traders can only buy Options (CE or PE) because Options writing requires full / huge margin just like
Futures trading. Whereas on the other hand, Smart money with huge corpus can easily write options. They are better
prepared for any wild moves & they know better how to manage their risk.

So in a nutshell, when you see huge OI (open interest) getting added to a specific strike price, it means that retail has bought
and Smart money has written. Keep an eye on 2 things –

1) Which strike price has maximum OI

2) Which strike price has maximum change in OI (this helps where the action has happened today)

Let me share an example with picture –

In the above picture for 8​th​ March 2019 EOD data (14​th​ March 2019 expiry) –

28000CE has max OI & 28100CE has max OI change

27500PE has max OI & 27000PE has max OI change

Therefore, from count perspective, 28000 will act as major resistance & 27000 will act as a major support for next week.

However, I have added customized this sheet & added couple of more columns (PE-CE) & PCR to understand what is
happening at each strike price. This helps the actual picture at each strike.

We all know the ​PCR concept​ – If PCR is above 1 then that level is bullish (acts as support) and if PCR is below 1 then that
level is bearish (acts as resistance). With this theory if you refer to the above picture, you get to know that 27700 is
immediate support because PCR is 1.81 (+ve) & 27800 is immediate resistance with PCR as .58 (net PE-CE OI in negative).

Note:

PE with max OI acts as major support & CE with max OI acts as major resistance. At these levels Smart money has written
Options and retail has bought (sold to Smart Money).

Also watch out for -ve OI change in CE & PE. This is called Unwinding. When CE unwinding happens, it means bulls are getting
fearful that price may rise up. When PE unwinding happens, it means bears are getting fearful that price will fall.

Hope this helps understand the overall concept cleaner & better. Let me know in case you have any questions.