Put Call Outlook

Here is the latest information on the top 3 most active nifty calls and nifty puts.

Broadly speaking, let us put factors which influence movement of the market into two (interdependent) categories
1) facts / news.
2) sentiments.

The second one is more abstract and sometimes harder to understand merely by reading newspapers. In the absence of significant big news the second factor is what controls short term movement of the market.

what could be a quantitative measure of the market sentiment ?

One of the simplest is the Premium or Discount at which the Nifty futures are trading. Too much premium is anticipation of forward movement and a discount is anticipation of a downward movement. However most of the times nifty trades at a premium of around 15 to 25 and in this case this measure is not fine enough. The other problem is that this measure is more an indicator of 'short term' movement of the nifty.

The other indicator is the change in open interest of options. Naturally, if a lot of people believe or fear the market is going to go down in the next few days/weeks, they will buy a lot of put options. So an unsual increase in the open interest of put options may be taken to be an indicator of the fact that the market expects the nifty to move downwards. Similarly a lot of buying of call options will indicate and anticipation of upward movement.

One has to be careful here though ! suppose a majority think the market is going down, not only will there be a lot of 'put buying' there may also be a lot of 'call selling'. So how to differentiate between 'call selling' and 'call buying'? Differentiating this may sound silly because one contract sold is also one contract bought. But this is where implied volatility comes into the picture for our help. If lot of people are trying to 'sell' call options, then the volatility implied by the call options will decrease. They will sell for a lesser price than the situation where lot of people are trying to 'buy' call options.

The put call outlook is all about trying to figure out and understand the market anticipation by looking at change in open interest of put and calls. Qualitatively it is easy. My goal here is to come up with a quantitative strategy.