Reading options data across equity and commodity markets

In India, options trading has expanded beyond equity. Nowadays, traders are actively engaged in derivatives trading in equity indices, stocks and commodity markets, each of which presents unique opportunities for traders. But the majority of traders use the same reading process for both equity and commodity markets without understanding the difference between them.

In this blog, we will delve into the process of reading options data in equity and commodity markets and how traders can use it to make informed trading decisions.

Reading the equity option chain

In equity markets, NSE’s Equity Derivatives segment offers options trading in five major benchmark indices (NIFTY 50, NIFTY Bank, NIFTY Financial Services, NIFTY Midcap Select, and NIFTY NEXT 50) and over 200 individual securities/stocks. 

The equity option chain has calls on the left, puts on the right, and strike prices in the centre. Traders analyse Open Interest concentration to identify key support and resistance. Strikes with the highest call and put OI are often viewed by traders as potential resistance and support zones, respectively. Changes in OI, combined with volume and LTP movement, indicate whether the market is building fresh positions or exiting existing ones.

The Put-Call Ratio (PCR), derived from the equity option chain, assists trading in gauging market sentiment. A high PCR signals a bearish market sentiment, while a low PCR below signals bullish market sentiment. However, extremely high PCR often serves as a contrarian bet.

Reading the commodity option chain

The commodities option chain is different from the equity option chain, where commodity options are options on futures and not spot prices, and the commodities are frequently traded on MCX. The MCX option chain offers trading in gold, silver, crude oil, natural gas, and many more.

When reading the MCX option chain, traders must account for two pricing layers: the futures price and the options premium. Implied Volatility in commodity options is significantly influenced by global events and spikes sharply near events like US Federal Reserve meetings or OPEC decisions, as India imports a significant portion of its energy and bullion needs.

Key differences between equity and commodity options data

Although the structure of option chains appears to be similar in both segments, there are significant differences. Equity options on NSE are cash settled and European style, meaning that they can only be exercised at expiry, but commodity options on MCX can be devolved into futures contracts at expiry. 

Additionally, commodity options are significantly influenced by global factors, while equity options are largely driven by domestic factors. Another important factor is liquidity. Liquidity and bid-ask spreads of equity options, particularly on Nifty and Bank Nifty, are much greater than most MCX commodity options.

How to use options data to make better trading decisions

In both markets, traders can spot high-probability setups by tracking OI build-up, volume-to-OI ratios, IV percentile, and PCR. Large OI additions at OTM strikes in equity markets can be a sign of positioning building before important events like RBI policy announcements or earnings releases. 

In commodity markets such as gold, an increase in IV prior to major US inflation data may suggest that traders are expecting increased volatility in gold prices.

Nowadays, modern trading platforms provide real-time option chain data, strike-based OI graphs, and IV history of both NSE equity and MCX commodity options, making reading option chain data easily accessible with several additional tools to help traders in this process.

Conclusion

Reading options data is not one-size-fits-all. The equity and commodity markets have varying settlement mechanisms, liquidity conditions, and price drivers, thus making it crucial for Indian traders to be aware of these differences. 

Whether analysing the option chain for equities or commodities like gold or crude oil, the trader’s approach should be tailored. Thus, traders who learn to read options data in both segments have a better, holistic picture of market positioning and risk.