An option chain is a chart with detailed information of all option contracts available for Nifty stocks. At first, traders might feel overwhelmed by options. But after they understand how to read option chain data, they have access to more information and can make better decisions within the market.
Published on 21 January 2023
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What is an Option Chain?
In simple words, an option chain is the listing of all option trading contracts. It comprises puts as well as calls for a particular security. Another term used to describe the listing is Option Matrix. It is very useful for trading on the next day.
A skilled trader can use the option chain to understand the direction in which the price is moving. Besides, it helps in the identification of points where a low or high level of liquidity is seen. It also allows traders to analyze the depth and liquidity of particular strike prices.
How to Read the Options Chain Chart?
Now that what is Option chain is clear to you, here’s a look at its various components.
Options type: Options are of two types - put and call.
Strike price: It is the value at which the buyers and sellers have agreed to execute the Options contract.
Open interest (OI): It represents the interest of traders at a specific strike price. A higher OI means more interest for the option’s actual intrinsic value.
Change in open interest: It includes any significant changes in the open interest before expiry. If there is a significant deviation in OI, it indicates that contracts are either exercised, squared off, or closed.
Volume: The volume indicates the interest of traders. It also shows the number of options contracts traded within the market for a determined price.
Implied volatility (IV): This type of volatility shows the price swing. A low IV indicates expectations of few or low swings in prices, while a high IV indicates chances of a high swing in prices.
In-the-money (ITM): ITM is considered when a call option’s strike price is smaller in comparison to the current market value. Similarly, ITM is when a put option’s strike price is a larger amount than the present market value.
At-the-money (ATM): It is an ATM if the strike price of a put or call option is equal to the current market value of the option.
Over-the-money (OTM): OTM’s call option is when the strike price is more than the current market value. Likewise, it is an OTM when the strike price of a put option is smaller than the present market price of the option.
How to Interpret the Option Chain to Your Advantage?
If traders know how to read options chains in NSE, they can easily make important trading decisions. Here’s how it helps:
Traders can identify essential stock levels to monitor.
Traders can identify fundamental support and resistance levels for a stock/index. If both are rising, it signals a bullish move. Similarly, if both are falling, it signals a bearish move.
Using components like volume, price change, OI, etc., traders can identify market player sentiments.
By looking at volume and OI, traders can check for liquidity.
Last words
Once you learn how to read option chain data, you can make better decisions on whether to buy a put option or a call option. You can decide the strike price and other details as well. For a trader, option chain data can help to differentiate between a profitable or a loss-making trade.
There are eight stock exchanges in India, out of which the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are the two prominent ones. If you wish to invest in the share market, you must do it via these stock exchanges. However, as per the Securities and Exchange Board of India (SEBI) guidelines, a common man cannot trade directly with the stock exchanges.
There are around 9 stock exchanges in India offering a secure trading platform to investors. These include the National Stock Exchange (NSE India), Bombay Stock Exchange (BSE), Calcutta Stock Exchange (CSE), India International Exchange (India INX), Multi Commodity Exchange of India (MCX), National Commodity and Derivates Exchange (NCDEX), Indian Commodity Exchange Limited (ICEX), Metropolitan Stock Exchange of India Limited (MSE), and National Stock Exchange IFSC Limited.
Have you ever thought of investing in the stocks of foreign companies? As per the Reserve Bank of India (RBI), you can invest up to 250 million US Dollars in foreign equity instruments in a year. But, are you aware of the methods through which you can do so?
There are eight stock exchanges in India, out of which the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are the two prominent ones. If you wish to invest in the share market, you must do it via these stock exchanges. However, as per the Securities and Exchange Board of India (SEBI) guidelines, a common man cannot trade directly with the stock exchanges.
There are around 9 stock exchanges in India offering a secure trading platform to investors. These include the National Stock Exchange (NSE India), Bombay Stock Exchange (BSE), Calcutta Stock Exchange (CSE), India International Exchange (India INX), Multi Commodity Exchange of India (MCX), National Commodity and Derivates Exchange (NCDEX), Indian Commodity Exchange Limited (ICEX), Metropolitan Stock Exchange of India Limited (MSE), and National Stock Exchange IFSC Limited.
Have you ever thought of investing in the stocks of foreign companies? As per the Reserve Bank of India (RBI), you can invest up to 250 million US Dollars in foreign equity instruments in a year. But, are you aware of the methods through which you can do so?
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