What is Option Chain & How to Analyse the data?| Espresso

What is Option chain?

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.

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Option Chain Definition

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.

  1. Options type: Options are of two types - put and call.
  2. Strike price: It is the value at which the buyers and sellers have agreed to execute the Options contract.
  3. 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.
  4. 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.
  5. Volume: The volume indicates the interest of traders. It also shows the number of options contracts traded within the market for a determined price.
  6. 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.
  7. Last traded option (LTP): It is the last traded price of an option.
  8. 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.
  9. 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.
  10. 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 understand the option chain, 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. 

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Frequently Asked Questions

An option chain provides detailed information regarding all option contracts available for Nifty stocks. It includes the put and call option strike prices along with their premiums for a specific maturity period. A trader can use the option chain chart to check stocks, indexes, and currency contracts.

An option chain chart is a listing of calls and puts for an underlying asset with a pre-determined expiration period. The components of the chart include options type, strike price, open interest, volume, implied volatility, and other factors.

Open Interest refers to the interest of traders at a particular strike price. A higher amount indicates more interest among traders for the strike price of the option.

A put option gives a trader the right to sell an underlying stock at a certain price up to a certain date. Conversely, a call option gives a trader the right to buy an underlying stock at a certain price before the option’s expiry date. There is no obligation on these transactions. Options chains are listed in both calls and puts. You will always see the call options listings first.