Part IV · Derivatives · M09A · week 5 · 14 h
The Indian options desk
The daily instruments of an Indian options trader, with their statistics: the option chain, OI build-up, PCR and max pain, IV rank, event implied moves, participant-wise OI, margins for hedged positions, adjustments and the stock-option settlement trap.
Builds on M07 Forwards and futuresM08 Option pricingM09 Volatility trading
Prerequisites M07 (open interest, SPAN and exposure margin), M08 (Black–Scholes and Black-76, Greeks, implied volatility, India contract terms), M09 (realised and implied volatility, the variance risk premium, strategies, expiry-day gamma). Mathematics: convex piecewise-linear functions and subgradients, the normal distribution, conditional Jensen, exchangeability, binomial tests. Time: ~14 hours (notes 7 h, problems 4 h, code 3 h). Primary texts: Natenberg, Option Volatility & Pricing (2nd ed., 2015), chapters on volatility spreads, risk and adjustments; Sinclair, Positional Option Trading (2020), chapters on event trading and sizing; M07 · 7.5, M08 · 8.9 and M09 · 9.7 for open interest, the Greeks and strategies; the NSE F&O bhavcopy and participant-wise OI files as primary data.
M08 and M09 built the theory of option prices. This module is about the screen and the files an Indian options trader reads every day: the option chain, open interest and its folklore, put–call ratios and max pain, IV rank, the market's implied move for a scheduled event, participant-wise positions, margins for hedged positions, adjustments, and the physical settlement of stock options. Every quantity is defined precisely, every folk rule is stated as a hypothesis, and where the course has the data (NSE F&O bhavcopies for April–November 2026) the hypothesis is tested.
Notation used throughout: the index or stock price, the forward (or future) for the option's expiry, a strike, time to expiry in years (calendar days/365 unless stated), an annualised implied volatility, the total implied variance, the continuously compounded rate. Open interest (OI) is in units of the underlying, as NSE reports it; one Nifty lot is 65 units (NSE F&O bhavcopy, 5 Nov 2026).
Learning outcomes
- Read every column of an NSE option chain, build the chain from the F&O bhavcopy, and infer the forward from put–call parity rather than from spot (9A.1).
- Decompose an option's daily price change into delta, gamma, theta and vega parts, and explain why the four OI build-up labels are a weaker signal for options than for futures.
- Define the OI and volume put–call ratios and max pain exactly; prove that max pain is the strike at which cumulative call OI below equals cumulative put OI above (Proposition 9A.3), and test "expiry pins to max pain" on data.
- Derive the effective volatility of a price driven by dealer delta hedging, state the pinning evidence (Avellaneda–Lipkin, Ni–Pearson–Poteshman, Golez–Jackwerth), and say what Indian data can and cannot reveal about dealer gamma.
- Derive the ATM straddle with its error term, relate it to the expected absolute move, and extract an event's implied variance from two expiries (Propositions 9A.5, 9A.6, 9A.9, 9A.10).
- Compute IV rank and IV percentile, and prove that the percentile is uniform under exchangeability while the rank is not.
- Read the participant-wise OI file and state its accounting identities and its limits.
- Compute a SPAN-like scenario margin for a multi-leg position, prove that it is subadditive and capped for defined-risk spreads, and analyse rolling, strangle-to-condor conversion and delta-neutral adjustments as changes of Greeks with explicit costs; state the obligations created by physical settlement of stock options.
Sections ≈ 2 h 55 min of study
- Foundation 7 sections · ≈ 1 h 5 min
- Core 11 sections · ≈ 1 h 35 min
- Advanced 2 sections · ≈ 15 min
- Learning outcomes Foundation 5′
- 9A.1 Reading an NSE option chain Foundation 10′
- 9A.2 The chain from the F&O bhavcopy Core 10′
- 9A.3 OI build-up in options Core 10′
- 9A.4 The put–call ratio Foundation 10′
- 9A.5 Max pain Core 10′
- Figure Max pain as an open-interest balance point
- 9A.6 Pinning: dealer gamma and the evidence Advanced 10′
- 9A.7 The straddle-implied move Core 10′
- Figure What the straddle prices
- Lab The Nifty option chain from the NSE bhavcopy
- 9A.8 IV rank and IV percentile Core 5′
- 9A.9 The term structure across weekly and monthly expiries Advanced 5′
- 9A.10 Extracting an event's implied move Core 10′
- Figure Extracting an event's implied move
- 9A.11 Participant-wise open interest Foundation 10′
- 9A.12 Margins for hedged positions Core 10′
- 9A.13 Position management and adjustments Core 10′
- 9A.14 Physical settlement of stock options Foundation 15′
- 9A.15 Weekly expiries and the SEBI loss data Foundation 5′
- 9A.16 Case studies Core 10′
- Summary of key results Foundation 10′
- Readings and resources Core 5′
- Facts that change Core 5′