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Unlocking Options Trading : The Power of Demand and Supply Part1
The Indian options market has experienced a remarkable growth of nearly 8 times since the pre-COVID era. This surge in volume and transactions has created new opportunities for retail traders and investors. While the NSE initially traded only Nifty and Bank Nifty, it now offers a wider range of indices like Midcap Nifty, Nifty Financial Services, Sensex, and Bankex. Despite increased participation, liquidity remains a concern for some instruments.
This article explores how the Demand and Supply strategy can be applied to options trading. I have been personally trading demand and supply strategy for over 13 years and have seen the power of this strategy working for any asset class for that matter be it the Indian markets or even the Global markets. Now the question arises can we use the Demand and Supply strategy for trading options and the plain simple answer is “Absolutely Yes!!”.
Today I am going to show how we can combine demand and supply and Options together to gain a superlative edge. Let us basically talk first about what is a demand zone? A demand zone is an area on the price chart where price has significantly moved to the upside creating a footprint of “Strong Buyers” and a supply zone is an area on the price chart where price has moved down significantly creating a footprint of “Strong Sellers”. As you can see in the above chart I have plotted the demand zone(Green) and supply zone(Red). These are the areas on the price chart where one can expect the price to turn.
Now if one want to switch gears and trade options what are the options that are available for a trader.
a. Upside Movement( Demand Zone)
b. Sideways Movement ( Middle of Demand & Supply)
c. Downside Movement( Supply Zone)
So the trader first needs to identify where the price is in context of the Demand and Supply zones. If the price is closer to Demand one can plan a bullish trade, if price is closer to supply zone one can plan a bearish trade and if prices are in the middle one can plan a sideways trade. As per the above example price is closer to a supply zone on the BNF so it will be more prudent for the trader to setup a trade in Options with a bearish perspective based on the demand and supply strategy.
In the world of options there are 2 types :
1. Call Options
2. Put Options
Buying Calls gives the right to buy and buying puts give the right to sell however one can even sell options and when one does that he has the obligation to sell in case of calls and obligation to buy in the case of puts
For an absolute layman this makes the process of understanding options a lot harder than what options actually are so we are going to breakdown these 4 positions and corelate these 4 positions with demand and supply. As an options trader one can create 4 positions.
1. Buy Call
2. Buy Put
3. Sell Call
4. Sell Put
We are going to break down these 4 positions into simple mathematical signs to arrive at a decision that out of the above 4 options strategies which is to be implemented in Demand Zone and which one is to be implemented in a Supply Zone. Let us break down these 4 positions as follows :
Buy --> “+”
Calls-->“+”
Sell --> “-“
Puts -->”-“
1. Buy Calls => + * + = +
Since the outcome is positive, we always implement a positive position at a Demand Zone therefore Buy Call as a strategy should be implemented only at Demand and cannot be implemented at Supply
2. Buy Puts ==> + * - = -
Since the outcome is negative, we always implement a negative position at a Supply Zone therefore Buy Put as a strategy should be implemented only at Supply and cannot be implemented at a Demand Zone
3. Sell Calls --> - * + = -
Since the outcome is negative, we always implement a negative position at a Supply Zone therefore Sell Call as a strategy should be implemented only at Supply and cannot be implemented at a Demand Zone
4. Sell Puts --> - * - = -
Since the outcome is positive, we always implement a positive position at a Demand Zone therefore Sell Put as a strategy should be implemented only at Demand and cannot be implemented at Supply
Thus by using simple mathematical signs we have made a complex understanding easy to follow where now a demand and supply trader knows and understand that which are the two strategies he can implement at a Demand Zone and which are the two strategies that can be implemented at a Supply Zone
Based on these calculations, we can determine the appropriate options strategies for different price levels:
• Demand Zone: Buy Call or Sell Put
• Supply Zone: Buy Put or Sell Call
I hope you found the previous explanation clear. Now that you understand how to connect demand and supply with options, let's discuss how to determine whether to buy or sell options. Is the Demand and Supply strategy enough or are there other factors to consider?". We will talk about that in Part 2 of Unlocking Options Trading : The Power of Demand and Supply Strategy
This article explores how the Demand and Supply strategy can be applied to options trading. I have been personally trading demand and supply strategy for over 13 years and have seen the power of this strategy working for any asset class for that matter be it the Indian markets or even the Global markets. Now the question arises can we use the Demand and Supply strategy for trading options and the plain simple answer is “Absolutely Yes!!”.
Today I am going to show how we can combine demand and supply and Options together to gain a superlative edge. Let us basically talk first about what is a demand zone? A demand zone is an area on the price chart where price has significantly moved to the upside creating a footprint of “Strong Buyers” and a supply zone is an area on the price chart where price has moved down significantly creating a footprint of “Strong Sellers”. As you can see in the above chart I have plotted the demand zone(Green) and supply zone(Red). These are the areas on the price chart where one can expect the price to turn.
Now if one want to switch gears and trade options what are the options that are available for a trader.
a. Upside Movement( Demand Zone)
b. Sideways Movement ( Middle of Demand & Supply)
c. Downside Movement( Supply Zone)
So the trader first needs to identify where the price is in context of the Demand and Supply zones. If the price is closer to Demand one can plan a bullish trade, if price is closer to supply zone one can plan a bearish trade and if prices are in the middle one can plan a sideways trade. As per the above example price is closer to a supply zone on the BNF so it will be more prudent for the trader to setup a trade in Options with a bearish perspective based on the demand and supply strategy.
In the world of options there are 2 types :
1. Call Options
2. Put Options
Buying Calls gives the right to buy and buying puts give the right to sell however one can even sell options and when one does that he has the obligation to sell in case of calls and obligation to buy in the case of puts
For an absolute layman this makes the process of understanding options a lot harder than what options actually are so we are going to breakdown these 4 positions and corelate these 4 positions with demand and supply. As an options trader one can create 4 positions.
1. Buy Call
2. Buy Put
3. Sell Call
4. Sell Put
We are going to break down these 4 positions into simple mathematical signs to arrive at a decision that out of the above 4 options strategies which is to be implemented in Demand Zone and which one is to be implemented in a Supply Zone. Let us break down these 4 positions as follows :
Buy --> “+”
Calls-->“+”
Sell --> “-“
Puts -->”-“
1. Buy Calls => + * + = +
Since the outcome is positive, we always implement a positive position at a Demand Zone therefore Buy Call as a strategy should be implemented only at Demand and cannot be implemented at Supply
2. Buy Puts ==> + * - = -
Since the outcome is negative, we always implement a negative position at a Supply Zone therefore Buy Put as a strategy should be implemented only at Supply and cannot be implemented at a Demand Zone
3. Sell Calls --> - * + = -
Since the outcome is negative, we always implement a negative position at a Supply Zone therefore Sell Call as a strategy should be implemented only at Supply and cannot be implemented at a Demand Zone
4. Sell Puts --> - * - = -
Since the outcome is positive, we always implement a positive position at a Demand Zone therefore Sell Put as a strategy should be implemented only at Demand and cannot be implemented at Supply
Thus by using simple mathematical signs we have made a complex understanding easy to follow where now a demand and supply trader knows and understand that which are the two strategies he can implement at a Demand Zone and which are the two strategies that can be implemented at a Supply Zone
Based on these calculations, we can determine the appropriate options strategies for different price levels:
• Demand Zone: Buy Call or Sell Put
• Supply Zone: Buy Put or Sell Call
I hope you found the previous explanation clear. Now that you understand how to connect demand and supply with options, let's discuss how to determine whether to buy or sell options. Is the Demand and Supply strategy enough or are there other factors to consider?". We will talk about that in Part 2 of Unlocking Options Trading : The Power of Demand and Supply Strategy
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