Mentoring Batch Precursor

“The best investment you can make,

is an investment in yourself.
The more you’ll learn the more you’ll earn.”

-Warren Buffet

Introduction

Congratulations to all the participants Who Have enrolled for the Mentoring Batch for making a
very wise investment decision for themselves.
On behalf of team OI Pulse we would like to welcome you all aboard this journey wherein your
voyage to become a pro trader would be highly accelerated.

The broad objective of this program is to provide mentorship to budding individuals who are
passionate about capital markets and see trading as a career or a major source of regular
income/wealth creation.

All of us know that to be a professional trader you must have some skill/system that gives you an
edge in the market. The edge that we would like you to develop is to “Catch the Pulse of Market”.
We are not talking about predicting the market as no one can do it but if we analyse various
factors that influence the markets in real time and connect the dots then we can arrive at a
conclusion that the underlying stock/index may behave in a particular manner with a high degree
of probability in the immediate time period. This is what we call “Pulse of the Market”. If we know
the pulse of the market we can look for opportunities and convert them to trades accordingly. You
will learn different trade setups that would give maximum return during different phases of the
market during the day.
We all know that markets are very dynamic in nature. They are highly volatile at opening,
sometimes during the day they make strong aggressive moves on up or downside, sometimes
they remain stagnant, sometimes they revert from important support and resistance levels. We
will help you analyse the pulse of the market, the strength of this pulse and how to trade
accordingly.
The most unique element of this program is that it will be a 100% live training session
wherein you will learn everything during the market hours. Live Market is the best place where
we can learn something. I guess that you realize now that we actually “Walk the talk”.
During the next 30 days you will be mentored by ace trader Mr Sivakumar Jayachandran who is
one of India’s best traders known for minting profits through options buying. You must have heard
that option buyers win only 25% of times while sellers win 75% of times, that's true but what is
not known is that option buyers win really big when they win. We do not want you to categorise
yourself into an options buyer or seller. We want you to develop an edge to catch the pulse of the
market and trade in every market scenario. Thus become a buyer or seller according to the pulse
of the market and win 100 % and not 25 or 75% of the time.

Now having stated the broad objectives of the Mentoring program I'm sure that all of you must be
really excited to begin this voyage. But before we begin this journey we have certain
expectations from the participants too, so that these 30 days can be a life changing experience
for all of the participants.
First and foremost we would like the participants to come with an open mindset to learn new
things.
We would like the participants to give not less than 100% of their capability to this program if they
want this to be a turning point of their life. I'm sure that all of you would put in best of best efforts
from your end to make this session a gateway to your financial independence.
Secondly since this program is of intermediate to advanced level we expect the participants to
have basic knowledge of Options and Derivatives before joining in.
We would really appreciate if you are able to answer following basic questions

1. What are Derivative Instruments that are traded?

2. What is a Future Contract?
3. What is Current Month, next month and the far-month future Contract?
4. Why is there a difference between the price of Future and Spot?
5. Why do Nifty/BankNifty Spot charts do not show any volumes but future charts do?
6. What is an Options Contract?
7. What is Call Option and what is Put Option?
8. What do you mean by weekly and monthly expiry of options contract?
 9. What is the strike price of an option?
10. What do you mean by ATM,ITM and OTM strikes?
If you are able to answer these 10 questions we assume that you have more than basic
foundational level understanding of options and futures. If however you find it difficult in answering
a majority of above mentioned questions we would suggest you to look for answers over the
internet as there is abundant study material readily available.
During the mentoring session we shall be trying to analyse the majority of factors that determine
the pulse of the market. We shall be connecting the Dots to catch this pulse. We expect
participants to master the art of analysing these market forces by the end of the Mentoring
session. In order to facilitate this learning process we have prepared some basic introductory
content that you must go through before joining the session. All these concepts shall be analysed
in greater depth during live market hours. So kindly go through the following topics to prepare
yourself.

1. What is Open Interest (OI)?

2. How does OI differ from Volume?
3. Do sellers determine the OI?
4. Does OI say something about market sentiment?
5. Why is change in OI important for intraday trading?
6. What is Long Buildup?
7. What is Short buildup?
8. What is Long Unwinding?
9. What is Short Covering?
10. What determines Options Premium?
11. What is Volatility?
12. What is Implied Volatility?
13. Why do different strikes have different IV’s?
14. Which strikes to choose for trading ITM,ATM or OTM and why.
15. What is India VIX?
16. What is the correlation between VIX and price levels?
17. What is the impact of Global Markets on Indian capital markets?
18. Who are different market participants in Capital & Derivative markets?
19. Importance of FII activity for next trading session.
20. What are useful trading indicators?
21. How to plot important indicators on a trading chart?
22. What is NEST?
1. What is Open Interest (OI)?
The term Open Interest refers to the total number of outstanding contracts of an underlying
asset at any given interval of time. This is the standard textbook definition that you will find
everywhere. But let us try to understand this in a practical manner.
Let us consider BankNifty Futures. When we say that we buy or sell BankNifty Futures
what we actually mean is that we are buying/selling that particular contract.
For any transaction to take place there has to be one buyer and one seller.

In this simple example a seller “A” writes “1” contract and that particular contract is bought
by a buyer “A”. Now in this scenario the Total Outstanding Contracts in open
Market is “1” thus OI is also 1.
 Now consider scenario 2

In this scenario the Seller “A” initially writes “5” contracts and all of these “5” contracts are bought
by one Buyer “A”. Now at any given interval of time what is the total number of outstanding
contracts? It is 5.

Now let us consider a modification in the above-mentioned scenario. Suppose after initially selling
5 contracts the seller wants to buy back one contract. Then he would ask the buyer to resell the
original contract back to him.
What would happen in this condition? One contract let us say contract no “5” which was with the
buyer after the initial transaction gets back to seller after transaction 2 when original buyer resells
the contract to original seller. Thus the seller buybacks his originally sold contract, After the
completion of resale transaction, contract no “5” gets out of the system and now the total number
of outstanding contracts is “4”. Thus in this situation OI would be “4”.

The above shown scenarios are oversimplified versions of real world conditions. But we just need
you to focus upon “TOTAL OUTSTANDING CONTRACTS”, what it actually means and how it
increases or decreases.

In the real world there will be multiple players who would simultaneously buy as well as sell
contracts. In Futures, players would buy and sell contracts belonging to different expiries and
overall OI would be determined by total outstanding contracts. Things get more complex in
Options wherein traders would simultaneously sell contracts of one strike price and hedge their
position by buying another option of different strike price. Here OI would be determined on the
basis of strike price and option type. E,g in Banknifty 33000 CE would have some number of OI
whereas 33000 PE would have a different value.

Thus with these examples we guess the concept of OI is clear.

Things to ponder upon based on OI
● How are prices determined whenever a transaction is carried out?
● When there is a buyback of a contract which player has a greater say in determining the
price?
● What will happen to the price of the contract if the original seller is eager to buy back the
contract?
● What will happen to the price of the contract if the original buyer is eager to sell his bought
contract?

Think about these points in detail to get deeper insights in derivative trading. We also
recommend you to watch this video to get more insights about Open Interest

https://youtu.be/MML3Od9DxuA

2. How does OI differ from Volume?

Now having learnt about what is OI we need to know what do you mean by the term
“Volume” in context of Options trading. In options world Volume refers to the number of
transactions that have taken place in a particular time period. By transaction we mean
buying and selling of an underlying contract during that particular time period.
Let us consider the time period of 15 minutes for Banknifty Future. For simplicity we will
assume that there are only 4 players in the market A,B,C & D. Let us see how OI &
Volume change during these 15 minutes
TIME A B C D

OVERALL
TRANSACT TOTAL TRANSACT TOTAL TRANSACTI TOTAL TRANSACT TOTAL VOLUME
OI
ION POSITION ION POSITION ON POSITION ION POSITION

9.16 10L 10L 2S 2S 3S 3S 5S 5S 10 10

9.17 5S 5L 1L 1S 3L 0 1L 4S 5 5

9.18 3S 4S 3L 3L 8 3

9.19 10L 15L 5S 9S 3S 0 2S 6S 15 10

9.2 2S 13L 2L 7S 13 2
In the above chart you can see how the Volume and OI change with the passage of time.
Let us decode what happens on a minute by minute basis

At 9.16 Participant “A” purchased 10 contracts from the market and participants “B”,”C” &
“D” supplied those contracts. So at the end of 9.16 “A” was 10L or had purchased 10
contracts whereas “B” was 2S or had sold 2 contracts, “C” was 3S and “D” was 5S. So
overall total outstanding contracts at the end of this minute were 10, so OI was also
10. Also since 10 transactions took place Volume was also 10.
Now what happened during the next one minute?
From 9.16 to 9.17 “A” who initially had purchased 10 contracts sold 5 of the bought
contracts which were purchased by “B” & “D”. So 5 transactions took place during this
period. So the Volume was 5 for this minute. Now what can you say about OI. Players “B”
& “D” bought back their initially sold contracts so overall 5 contracts were removed from
the system, thus OI reduced to 5.
Let’s look at what happened from 9.17 to 9.18. Player “B” who had sold 1 contract net sold
3 more contracts and player”C” bought them. In this minute 3 transactions took place so
Volume was “3” and 3 new contracts entered the system, so OI increased to 8. Now on
similar lines just try to figure out how OI and Volume changed for the next 2 minutes.

Key notings for OI and Volume:

● OI of an underlying contract may increase or decrease with time during any period,
whereas Volume can only increase and never decrease.
● For any given time interval change in Volume shall always be greater than or equal
to change in Volume.

Now having understood the technicalities of Volume and OI let us focus on the
practical aspect of Volume that would help you take actual trades.
Volume represents the sentiment of the participants. If during any time interval
price increases along with significant volume then it means that participants are
bullish. If price rises without Volume then it may be a fake up move. Similar laws
apply for bearish mood also i.e if price decreases along with increase in Volume
that means majority of participants are bearish.
 So take it as your first lesson that in order to find the mood of the market,
always look for price changes along with volume.
Now we have used words like “significant” volume in ongoing discussion, but what
exactly is this significant in terms of number?
This numerical value can be arrived at only on the basis of years of experience or
thorough backtesting using complex algorithms. We have done both and arrived
at some number which is as follows
For Bank Nifty: On a 3 Min time frame any move that is accompanied with
volume of more than 50,000 is a significant up or a down move and thus may be
used to find the mood of the market.
For Nifty: On a 3 Min time frame any move that is accompanied with volume of
more than 125,000 is a significant up or a down move and thus may be used to
find the mood of the market.

Things to ponder upon based on Volume

● Can you differentiate between fake and real up/down moves of price with help of
Volume candles?
● In a 3 minute time frame how many consecutive candles with volume greater than
50K would you like to see in order to determine the pulse or the mood of the
market?
● Suppose you see a chart on a 3 minute time frame, what inferences can you make
out from the length of Volume candles?

We encourage you to think about these aspects as they shall be discussed in great
detail during the live session. Also go through following video for more clarity

https://youtu.be/7CHhoabx_d8

3. Do sellers determine the OI?

It is a very serious aspect that one needs to ponder upon, who determines the Open
Interest buyer or the seller. Well the correct answer to this question is that both Buyers
and sellers together determine the total OI, since it is a contract involving both buyer as
well as seller. So though both determine the total outstanding OI but who out of the two
dominate the pricing of options? The answer to this question is that sellers dominate the
pricing aspect of options for the majority of time and this is the reason that they dominate
most of the time but certainly not every time.
It is an outcome of demand and supply. In derivative options sellers are suppliers whereas
option buyers create demand. There will be times when demand is high and sometimes
supply is higher. When the supply is higher the option prices tend to drop and when
demand is higher the prices tend to rise.

Just consider the above graph. Suppose we are at an equilibrium at point 1. Now suddenly
the supply increases to point “2”, what do you think would happen to the price? It would
come down as the equilibrium is restored.
Similarly if the demand rises to “3” then the prices will increase to establish new
equilibrium.
 Now in order to have a better understanding we encourage you to think of certain
scenarios when there is an imbalance of demand and supply?

❖ When the markets are relatively stable, who do you think will dominate the prices
of both calls and puts? Buyers or sellers?
❖ Let us assume there is a sudden upmove.
➢ What will be the state of mind of CALL writers?
➢ Would they prefer to write more Calls or approach the buyers to buy back
their contracts and cover their position?
➢ What will happen to the Call option prices in such a scenario?
❖ Let us assume there is a sudden downmove.
➢ What will be the state of mind of PUT writers?
➢ Would they prefer to write more PUTS or approach the buyers to buy back
their contracts and cover their position?
➢ What will happen to the PUT option prices in such a scenario?
Just try to analyse these scenarios in your mind. We will have a detailed discussion
on such scenarios during the live session when we will take a trade according to
imbalances in demand and supply.

4. Does OI say something about market sentiment?

We would like to state that we consider OI to be God of Options trading. We say so
because if it is analysed properly it decodes the market sentiment.
The explanation to this is quite simple and logical. Market sentiment is driven by the action
of market participants. If we know how the dominant market participants are playing in
the market and where exactly they are playing we have a pretty good chance of being
profitable as these dominant players drive the markets. As retailers we should always try
to align our trades with the Big Boys of the Capital market. OI data gives all the information
to know the actions of these Big Boys. We must learn the art of deciphering this crucial
information.
As an exercise consider these two scenarios
● What do you think should be the trend if you observe that OI of Puts is continuously
increasing whereas CALL OI is decreasing simultaneously?
 Think from the perspective of Option sellers.
Why are Put writers being aggressive while Call writers are running for cover. What
do you think is going to happen?

● What do you think should be the trend if you observe that OI of both Calls & Puts
is continuously increasing simultaneously?
Do you think that both are being aggressive and not clear about the direction of
the market?
Do you think that market will be range bound in such a scenario?
What do you think is going to happen?

5. Why is change in OI important for intraday trading?

We know that intraday moves may or maynot align with the long term trend of the market
and thus relying on overall OI at any given moment may not be a good idea. What would
be more important for intraday trading would be how the OI is shaping up for the day or
what is the relative change in OI with respect to the previous day Open Interest.

6. What is Long Buildup?

7. What is Short buildup?
8. What is Long Unwinding?
9. What is Short Covering?

These four terms constitute the heart of this training session and shall be using them
extensively. Thus it is very important that you understand what these terms actually mean.
The following discussion would be a bit technical but very logical. Read this section twice
if you are not able to grasp the concept in one go.

These four terms actually refer to 4 different combinations of “Rise/Fall in Price” and
“Rise/Fall in OI”.
These four combinations can be
1. Rise in Price & Rise in OI
2. Rise in Price & Fall in OI
 3. Fall in Price & Rise in OI
4. Fall in Price & Fall in OI
In order to understand them we will go back to our demand and supply graph

Shown above is a simple demand and supply graph, I have used it in the context of Option
contracts. Assume it to be a graph of CALL Option. Along X axis is Quantity of Contracts Open
i.e Open Interest and along Y axis is the Price.

Assume we are at point no 1 where the price is P1 and OI is O1. Now what will happen if there
is a sudden jump in supply of contracts. On the graph we will move from point no 1 to point no

2. Demand Supply equilibrium has been disturbed. Supply has gone to 2. Now in order to restore
the equilibrium demand will follow and the following will happen.
So New Demand curve is generated to accommodate new supply. If we analyse from the graph
what have been the outcomes?

i. Price has reduced ii.

Quantity (OI) has increased.

This is known as Short Built Up.

So what happened here , there was an oversupply of Call Option contracts and then buyers got
inclined to them but at a decreasing price.
When will this happen in a Call Option?. Only when the scenario is bearish i.e the Index is moving
or likely to go downwards.
What can we say if we are to analyse this in context of Put options. Put Option writers would
flood the market with new contracts when they are confident that index/underlying is going to
move upwards i.e scenario is Bullish. (A contrast but true).
So we would summarise short build-up in the following manner..

i. It is surely driven by Sellers or option writers. Buyers respond to them.

ii. It surely leads to lowering of prices of contracts.
iii. It means that Option Seller is confident that the price won’t cross this strike price. It is a
mixed signal and may have three interpretations
a. Index may decrease further. (Very High Short built up)
b. The underlying index may remain standstill. (Moderate Short built up)
c. Index may increase but not cross the strike price at which Short built up happens.(Low
Short Built up).

So as an option buyer I know that signals are mixed and should look for opportunities in
the opposite direction and not in their direction. This means if there is a high short built
up in Call option then being an option buyer I should concentrate on Put option.
Strikes with decreasing option prices but rising OI is a honey trap for buyers set by
sellers..STAY AWAY.

In a similar manner I will discuss the other three scenarios. I would use the following figure to
discuss them.
 Figure 3: Terminologies

LONG BUILT UP

Refer to figure 3.
Suppose initially the maker is at point no 1 and suddenly there is a jump in demand of contracts
(CALL contracts). The rise in jump happens from point no 1 to point. No 3 along the demand
curve. As a result supply would readjust but at an increasing price which is justified as new buyers
would be ready to pay more price than existing one and sellers would demand higher price as
they are going into a zone of discomfort.

So following are the outcomes

 i. Price of option contract increases ii.
Quantity (Open Interest) has increased.

This is LONG BUILT UP.

So what has happened here. The buyers have stormed in and broken the equilibrium. They are
enticing sellers to write more contracts by offering them more price. When do you think this would
happen? Only when the index moves in direction of Option buyer i.e In upward direction for Call
buyer and downward direction for a Put Buyer. Thus it may be both bearish or bullish depending
upon which side you want to be.

So it would summarise my understanding of long built-up in the following manner..

i. It is surely driven by Buyers or option buyers. Sellers respond to them. ii.

It surely leads to an increase in prices of contracts.

Now what can be the expectations in a Long built up?

I would start by saying that Long built up would happen at OTM strike price. It gives a strong
signal that price would move in this particular direction i.e towards OTM strike at which Long
Built up happens. We also have to respect the fact that so many sellers at the strike price with
long build up would provide a strong resistance for the price to cross that level.
As an intraday option buyer I’m only concerned with the rise in option premiums and that can
happen only if index moves in a particular direction and long built up provides that direction. So
in short Option Buyer is confident that

a. Index will not move against the direction.

b. It would easily move in the direction

So as an option buyer I should look for opportunities in the direction suggested by Long built up
and not in the opposite direction. This means if there is a high long built up in Call option then
being an option buyer I should concentrate on Call option.
So we see that short built at a strike indicates strongly that price won’t breach that level and long
built at OTM strike gives strong signal the price would move towards that particular strike but may
or may not breach it due to strong resistance offered by Option sellers. What if both happen
simultaneously. It is a strong signal for Option buyers. Consider following hypothetical scenarios

Scene 1: Nifty Option Chain

ATM strike 9600
Strong Long Built Up @ OTM 9800 CE Option (Rise in OI+Price)
Strong Short Built Up @ OTM 9500 PE Option (Rise in OI and fall in price)
This indicates that chances are very high for the nifty to move towards 9800 from 9600. Totally
bullish market.

Scene 2: Nifty Option Chain

ATM strike 9600
Strong Long Built Up @ OTM 9400 PE Option (Rise in OI+Price)
Strong Short Built Up @ OTM 9700 CE Option (Rise in OI and fall in price)
This indicates that chances are very high for the nifty to move towards 9400 from 9600. Totally
bearish market.

SHORT COVERING & LONG UNWINDING

This is interesting. Refer to figure 3 again
Suppose initially the maker is at point no 1 and suddenly there is a pullout of contracts (CALL
contracts). This would now happen only in two ways.
Either the pullout would be led by buyers or the sellers. So OI would decrease in both cases. Who
caused it would be known only through price action.
If the sellers want to move out then to square off their position they need to buy back contracts
that they have already sold. So their buying action would lead to increase in demand and thus
prices. This would be Short Covering.
If the buyers want to move out then to square off their position they need to sell their existing
contracts. So their selling action would lead to increase in supply and thus decrease in prices.
This would be Long Unwinding.
So the identification goes as follows
Short Covering is Fall in OI accompanied with rise in price
Long Unwinding is Fall in OI accompanied with fall in price

In order to analyse it further we need to focus on the fact that OI is decreasing. But the big question
is WHY OI is decreasing and who is leading this closure and under what circumstances. Think in
following manner

● If a seller of contract is leading the contract closing/OI reduction then it may be because
of two reasons
○ To book his/her losses and save from further loss
○ To realise the profit

● Similarly If buyer of contract is leading the contract closing/OI reduction then it may be
because of two reasons
○ To book his/her losses and save from further loss
○ To realise the profit

So the conditions for both buyers and sellers are the same, it just happens during different market
conditions.

In fact all these conditions happen simultaneously. Let us try to understand it further.

Let us consider the following hypothetical situation.

Nifty spot price 9600 and we have a Long built up at 9800 CE option along with short built up at
9700 PE strike rate. So the signal is strong that the price would move towards 9800.
Now the price starts rising and reaches 9700. What would happen We
will still expect the Long Built up to grow stronger at 9800 CE.

Now the spot touches 9800. Here sellers start becoming nervous. Some may want to exit as if
the trend continues they would come in a loss making situation. These nervous sellers would
square off their position. However they may be sellers who expect that collective strong resistance
would lead to reversion of trend. So nervous sellers would exit and aggressive sellers may enter.
What nervous sellers would do is to close their contracts and what aggressive sellers would do is
to write new contracts. In this situation the price of option and OI doesn’t change much.
Now assume price crosses 9800 and touches 9900 and trend establishes. What would happen?
Sellers would just want to exit by squaring off.Their action would create demand and thus further
rise in price of option. So OI would decrease and price would increase as sellers are covering
their position to book their losses.
Now assume the nifty touches 10000 and the trend slows down. Option buyers feel that
momentum is losing and call it a day. They would press the sell button and exit the market to
book their profits. They would have to sell their contacts and thus increase the supply. This would
lead to fall in prices along with fall in OI.

The cycle would look like this

i. Nifty @ 9600: Long Built up @ 9800 CE/Short built up @ 9700 PE: Strong bullish signal
ii. Nifty 9600—->9700: Long Built Up @ 9800 CE continues
iii. Nifty 9700—->9800: Nervous sellers-exiting position/Aggressive sellers -writing new
contracts: OI doesn’t change much
iv. Nifty 9800—->9900: Sellers start panicking: Would square off: OI falls.Short Covering.
Further rise in option premiums.
v. Nifty 9900—->10000: Buyers call it. Day. Book their profits: Would sell their existing
contracts. Oi decreases.Long unwinding.Option premium falls.

This is a hypothetical example..reality would be a bit distorted but things actually shape up in this
manner only.
I would again request you to read this section thoroughly to imbibe the understanding of these
four concepts at a functional level.

10. What determines Options Premium?

Options premium is a function of demand and supply. If the demand is more, we know that
any option would be expensive and if demand is low, the options premium is expected to
be relatively cheap. But this definition is very naive and generic. We must dive a bit further
into options pricing to know the dynamics of the markets.

The above diagram is self explanatory as to what determines the Options Premium. But
what we would like to stress upon is the fact that Intrinsic Value and Risk Free Interest
Cost are static in nature but the most important factor is “RISK COST” that is determined
solely on the basis of “VOLATILITY”.
More the environment is volatile, more would be Volatility and thus more would be the
Premium.
Also “Days to Expiry” also play a significant role in determining the Options Premium.
More are the days left for expiry to happen more would be the premium.

Things to Ponder upon

● In an option Chain ATM strikes have intrinsic value as “0”. Then why do Call & Put
ATM strikes of the same underlying have different premium values?
● Do OTM Put options generally have more premium than equidistant OTM Call
options?
11. What is Volatility?
Volatility is one of the most important but least understood aspects of Options trading. We
will try to understand Volatility through something known as the “Normal Distribution
curve”.

Though it may sound a bit complex, just try to understand through this diagram.

Volatility refers to how far the price tends to go away from current price.

In the above diagram along the X axis are shown the price ranges and along Y axis is the
probability of occurrence. You can observe that for the Price of 34000 three points have
been marked in the graph 1,2 & 3. Out of them Point no 1 is highest along Y axis thus has
highest probability of occurrence, that means that price 34000 is likely to be attained with
highest probability when we have “Moderate-volatility”. On the basis of this we will try to
understand volatility.

Just consider the following hypothetical example.

Consider we are looking at BankNifty just before the Union Budget is to be announced.
Nobody knows what the real outcome would be. The budget may be good and the Finance
Minister may announce reduction in Corporate Tax rates or the budget may be really
disappointing wherein the same Finance Minister may announce a hefty increase in
Corporate Tax rates to finance the expenditure against Covid. There is a lot of uncertainty
with regard to outcome.
In case the budget is positive the Banknifty may move strongly from 33000 towards 34000.
But in case the budget is negative, BankNifty may move down towards 32000 as well. This
situation is known as the “HIGH VOLATILE” environment.
Thus during times of high volatility prices tend to move farther away from the mean or
current price.
Just look at the “High Volatility Distribution” curve in the diagram. 33000 is the mean or
current position and the shape of the curve is relatively flat as compared to other other
curves. So what does this mean. It means that the probability of price to stay at 33000
itself is minimum when we have a high Volatility. Also the probabilities of extreme prices
like 35000 or 31000 is maximum when volatility is maximum.
Now observe the “Low Volatility Distribution” curve. As per this diagram the probability of
price to stay at 33000 itself is maximum in this kind of environment whereas chances of
price going to extreme levels like 35000 or 31000 are very low though not impossible.

So just summing it up, in High Volatility environment Prices tend to go very far away from
the current level whereas in Low Volatility environment Prices tend to stay around the
current level or mean prices.

So I guess that you must be clear now what exactly you understand by Volatility.

Now we would like you to ponder upon the following questions.

● How does Volatility impact options premium?
● Is it sensible to buy or sell options when Volatility is high?
 ● How will you decide whether any particular numerical value of Volatility is high or
low?

12. What is Implied Volatility?

This concept is of prime importance and often misunderstood by many traders. So we will
try to understand what Implied Volatility is, how it is arrived at and what is its significance
for trading?
I guess you remember what factors determine Options Premium. Here is a quick revision

We had mentioned earlier as well that Volatility is the most crucial factor in determining
the options premium.
Before knowing what Implied Volatility is, we will understand how it is calculated. We
know that options premiums are a reflection of demand and supply equilibrium. But there
are many mathematical models too that are used by sellers to determine the correct
option price. One of them is Black Scholes model. This computer model gives optimum
price of an option when we feed following inputs to the system
1. Spot price
2. Interest Rate
3. Days to Expiry
4. Strike Price
5. Volatility
However what price we get as an output may or maynot be the same as the actual options
price.

Let us say the theoretical price of 33000 CE comes out to be Rs 126 but actual trading
price is Rs 150. So why is there a difference? Is our mathematical model flawed...NO. It
is because our input parameters are not correct. Out of all the input parameters it is
Volatility that is the problem. We do not know what the correct volatility is.
So we do a reverse calculation and calculate which Volatility level would give options
premium to be Rs 150. This reverse calculated Volatility is known as Implied Volatility.

So this is something that is Good to know but what is the significance of it? Well IV has
many advantages. If you compare IV with historical Volatility that can be calculated from
actual price variations we can come to know whether Volatility is high or low. Thus we
can plan to trade accordingly.

Secondly the most unique aspect of IV is that it shows which side of the strike price the
buyers are concentrated on. We know that the side with dominating buyers will have
more demand than supply thus the prices will tend to be higher and so would the IV. So
if we compare IV of ATM strikes the strike with higher IV will have greater concentration
of buyers.

So I guess that the basics of IV are clear now. IV would help to a very great extent in
decoding the market sentiment. At this juncture we want you to seriously consider the
following question

“We know that ATM strike side (Call or Put) with higher IV levels would have more
buying pressure, but what exactly is the threshold difference in IV levels that confirms
this logic? And what will happen if we have IV on one side higher than the other but the
difference is not equal or greater than the threshold level?”

We will discuss this aspect of IV in great detail during the session, but we would expect
you to think about it. In the meantime you should also go through following video about
IV
 https://youtu.be/5j2WnJNsvvY

13. Why do different strikes have different IV’s?

Ideally all the strikes should have the same IV but they do not. The reason behind this is
simple demand and supply distortions. Usually we will see OTM strikes to have more IV
than ATM strikes.
At this juncture we would like to point towards a very important observation. IV of Puts
shall always be greater than IV of Calls which are equidistant from ATM strikes.
Let us say Banknifty ATM strike is 33000. Then we might observe IV of 33500 CE to be
34 whereas IV of 32500 shall be 39. Why do you think this phenomenon occurs? Well the
answer to this is that we usually have more put buyers who often buy puts to hedge their
position. Thus there is inherently more demand for Puts as compared to Calls. This is
mainly on account of Long Portfolio holders who want to hedge their position against
downside risks.

14. Which strikes to choose for trading ITM,ATM or OTM and why?
The answer to this question depends upon the mode of trading. If one is looking for selling
options then you need to play with OTM strikes in both Calls & Puts. If one wants to buy
options then always look for ITM strikes.
If you buy OTM options then though the premiums are low and you could buy more lots
as compared to ITM strikes but your risk would be much higher if the trade goes against
you. Also the appreciation in premium would be much higher in ITM than OTM whenever
the index moves in your direction. SO ITM would give you a better return in absolute terms
and also is more protective than OTM’s.
For options selling OTM strikes are a better choice as they are less sensitive to movement
of underlying index while their premium decays more due to time decay in % terms.
ATM strikes may be chosen for both buying as well as selling depending upon IV levels.
If IV’s are higher than historical values they may be considered for selling and if IV levels
are low then they may be considered for buying as well.

15. What is India VIX?

 VIX is another method of knowing Volatility of the market. It is the Volatility Index and also
known as the Fear Index. We can think of it as an indicator that quantifies the risk
perceived by the majority of market participants. If VIX levels are high then it means
markets are highly volatile and if they are low then it means that markets are relatively
stable.

VIX is computed using premiums of OTM CALL & PUT options of NIFTY (not Bank
Nifty), so it works best for Nifty.
Kindly go through following video to get a better view about VIX
https://youtu.be/wdkSqaLNVvk

16. What is the correlation between VIX and price levels?

We will not go into the science behind calculation of VIX as it is not necessary. What is
important is the relationship between VIX and Price and how it impacts the market
sentiment. We have summarised correlation between index prices and VIX which is as
under

● If Price Increases and VIX decreases it is a bullish scenario.

● If Price Increases and VIX increases it means the market doesn’t like upwards
movement of Price so it may revert back.
● If Price decreases and VIX increases it is a bearish scenario.
● If Price decreases and VIX decreases it means it doesn't like the down movement
of the market.
● If VIX behaves erratic during the day then VIX should not be taken into
consideration as a factor.

As an exercise plot the VIX chart and try to analyse the times when VIX levels
have been historically high.

17. What is the impact of Global Markets on Indian capital markets?

In today's scenario all the Global economies are interrelated. Thus the same has to
happen with Global Capital Markets as well. DOW Jones is said to be the mother of all
markets. You cannot afford to ignore what is happening in DOW. Movements in DOW will
get reflected in Indian Markets every time. We have the advantage of time difference
 between DOW and Indian markets. So we must consider the DOW Jones spot of the
previous session and also look at DOW Futures while trading.

18. Who are different market participants in Capital & Derivative markets?
There are many participants in the market and they may be classified into 4 categories
1. Foreign Institutional Investors (FII)
2. Domestic Institutional Investors (DII)
3. Pro’s (Proprietary Traders/Brokerage Firms)
4. Retail Investors

19. Importance of FII activity for next trading session.

Since these institutional players have deep pockets they trade in huge quantities with big
capital running in thousands of Crores. Thus they are the Market Movers and can have
a significant impact on the Trend of the Market.
Thus it is very important to analyse whether they are pumping in money or taking out
money from the markets. It is also important to know where they are transacting ,
whether they are transacting in Cash Market or Derivative Markets, how much they are
investing in Futures and by what amount they are trading with options. We need to track
this information as it would have a major impact on the next trading session.

We will learn how to track their activities in a Live session and how they impact the
markets.
We want you to think about following aspect of FII data
What kind of information on FII activity is available and where?
How can we analyse FII derivative data (their activities in Futures and Options)

20. What are useful trading indicators?

Though there are many technical indicators, we would like to state that we would like you
to focus only upon a few indicators. Our recommendation is that you can use any indicator
you are comfortable with as long as it is giving you results.
 However we use following technical indicators on a 3 minute time frame
1. VWAP (Default)
2. Volume (Default)
3. RSI (Setting Length:14 for Close Price)
4. Supertrend ( Factor of 10 and Multiplier 2 for 3 min & Factor 7,Multiplier 3
for timeframes >15 min)
5. PSAR (Default)
6. VWMA (Volume Weighted Moving Average: Setting Period 20)
21. How to plot important indicators on a trading chart?
These indicators may be plotted using the settings mentioned above on your charting
platform. For the TradingView platform (highly recommended) we have a pine script that
you can use to plot VWAP,PSAR & Supertrend along with price.

Just copy the following script

OSPL - Siva Sir.txt

And follow the procedure as given under

1. Go to your chart in trading view and click on pine editor

2. Delete the existing code and paste the new code and save it and minimize this code editor
window.

3. Go to indicators and click on my scripts then you should see that in your chart

Volume and RSI you can plot separately.

Here is a procedure to draw lines of 50 K over Volume

Step 1: Plot Volume on your Trading View using “Volume” indicator
Step 2: Use option Horizontal Line from menu as shown
 Step 3: Right click on the Line plotted and select “Settings”

Step 4: Once inside settings set the coordinates as 50000 and then you are done

22. What is NEST?

Nest is a trading platform that would help you to place orders. The best advantage of this
platform is its amazing speed and capability of placing orders in fraction of seconds.
We highly recommend you to use NEST for scalping. Kindly go through the following video

to learn various features of NEST trading platform. https://youtu.be/M6OSrkSKmRw

Conclusion:
As we have said earlier, these 30 days can be a major turning point of your life, thus kindly
put in the best of best efforts from your end to become successful traders just like previous
participants who have achieved new heights in their trading career.
Thus kindly go through these topics and come with an open mind to the mentoring session.

All the Best!